Escorts shares fell nearly 3 percent intraday on May 8 after the company reported fourth quarter earnings that were in line with estimates. Brokerages are mixed on the stock though.
The tractor maker reported 8 percent year-on-year growth in profit at Rs 121.35 crore on revenue growth of 13.6 percent at Rs 1,631.66 crore in March quarter.
The stock was quoting at Rs 633.25, down 2.42 percent on the BSE, at 10:15 hours IST.
Brokerage: HSBC | Rating: Buy | Target: Rs 980
While maintaining buy call on Escorts with a target price at Rs 980, global brokerage house HSBC said margin & working capital miss is likely to reverse in coming quarters and guidance of 5-8 percent for tractor industry for FY20 is higher than our estimates.
Improving operating metrics is expected to drive re-rating.
Brokerage: Credit Suisse | Rating: Outperform | Target: Rs 920
Credit Suisse also maintained outperform rating on the stock, but slashed price target to Rs 920 from Rs 1,060 after cutting FY20/FY21 earnings estimates by 15 percent on lower tractor volumes.
Cyclical slowdown is already factored in the stock price. The company expects to continue gaining market share in FY20.
Mix has been worsening, but we still expect margin improvement in FY20.
Brokerage: Emkay | Rating: Hold | Target: Rs 660
We expect revenue growth to taper from 24 percent in FY19 to 9 percent in FY20, and 2 percent in FY21, led by a reversal in the tractor sales cycle.
EBITDA margin contracted by 50bps QoQ to 11.6 percent due to adverse mix and inventory provisions. We expect margin to contract from 11.8 percent in FY19 to 11.7 percent in FY20 and 10.9 percent in FY21 due to lower scale, adverse mix, and marketing spends.
The tractor industry is cyclical in nature, and the uptrends generally last for 3-4 years. After strong volume growth at 16 percent CAGR over FY16-19 in domestic tractors, we expect flat growth over FY19-21, due to the high base.
We build in revenue and earnings CAGR of 6 percent and 1 percent, respectively, over FY19-21. We maintain hold rating with a target price of Rs 660, valuing it at 12x FY21E core EPS.
Brokerage: Motilal Oswal | Rating: Neutral | Target: Rs 724
We cut our FY20/21 EPS by 4/5 percent to factor in the reduction in our volume estimate by 1 percent for both years given uncertain tractor demand.
We also cut our EBITDA margin estimate by 40bp to factor in higher expense and operating deleveraging, leading to an earnings CAGR of just 6.5 percent over FY19-21. With the uncertainty around tractor demand and the cyclicality in the CE business, current valuations capture most of the expected positives, in our view.
We value the stock on 12x Mar'21E EPS to arrive at a target price of Rs 724. Maintain Neutral.
Earnings call highlights: (a) Domestic tractor industry is expected to grow at 5-8 percent in FY20. (b) Market share expanded by 110bp to 11.8 percent in FY19 and by 190bp to 15 percent in 4QFY19. (c) Escorts expects to correct the inventory level from around 4 weeks to around 3-3.5 weeks by June. (d) Financing availability is not a constraint yet. (e) FY20 capex guided at Rs 250-300 crore.
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