Tractor maker Escorts slipped 1.8 percent intraday on Thursday after Reliance Securities downgraded the stock to reduce from buy citing higher valuation.
The research house also revised its price target downward to Rs 760 from Rs 875 earlier, implying 7 percent downside from March 27 levels.
The stock rallied nearly 22 percent in last one month, but lost 2.5 percent in one year. At 11:33 hours, it was quoting at Rs 805.10, down Rs 11.70, or 1.43 percent on the BSE.
Escorts has delivered a strong performance over last 3 years with around 23 percent CAGR in its tractor sales over FY15-FY19E on the back of up-cycle in tractor segment.
Moreover, favourable geographic-mix coupled with its strategic initiatives helped Escorts in gaining market share in FY19.
However, following a spectacular performance, the tractor industry is expected to take a pause in FY20 and would undergo cyclical downturn in FY21, Reliance Securities said.
Further, extended winter in 2019 may lead to delayed monsoon this time, which may have negative impact on the agrarian output in FY20 and resultantly would impact the tractor volume across regions in FY20, it added.
The research house said though non-agri usage of tractors would drive the volume to some extent, it would not be sufficient to compensate the expected fall in agri-driven tractor demand.
Therefore, the brokerage reduced its tractor volume growth forecast for Escorts for FY20 and FY21.
In view of expected down-cycle, Reliance Securities also lowered its target P/E valuation multiple on the tractor maker from 14x to 13x 1-Year forward.
Moreover, recent price run-up makes the stock’s valuation higher than its fair value and hence, the brokerage downgraded its recommendation on the stock.Disclaimer: The above report is compiled from information available on public platforms. Moneycontrol advises users to check with certified experts before taking any investment decisions.