Can Escorts Kubota regain lost ground?

the management has revised tractor industry growth outlook for FY26 to low double digits

Highlights

•  Agri-machinery volume increased by 30.3% YoY
• Volumes continue to decline in the construction equipment segment
• Exports remain strong
• Tractor industry growth outlook for FY26 now expected to be in low double digits

The company reported a decent Q2FY26 performance, despite challenging domestic conditions, especially in the construction equipment (CE) segment. While export traction and product refreshes remain encouraging, domestic market share pressures, delays in land acquisition, and cyclical softness in CE limit near-term upside.

Q2FY26 performance

The agri-machinery business had a solid quarter, with revenues jumping 29.1 percent year-on-year (YoY). A strong underlying demand and a better product mix clearly worked in its favour.

Segmental EBIT (Earnings before interest and taxes) margins expanded by 368 basis points (bps) YoY to 12.8 percent, driven primarily by a higher contribution from non-tractor verticals.

On the other hand, the CE segment saw some pressure. Volumes fell to 1,146 units, compared to 1,394 units last year, largely due to a contraction of ~4 percent in the overall industry and the shift towards new emission norms, which temporarily disrupted demand.

Segmental EBIT margin contracted to 3.8 percent, down 549 bps, primarily due to the clearance of old-emission inventory and lower production levels, impacting fixed-cost absorption.

In Q2FY26, overall EBITDA (Earnings before interest, taxes, depreciation and amortization) margins improved on a YoY basis, supported by softer material costs, stronger operating leverage, and continued cost discipline across the business.

Exports strengthen

Export volumes rose 26.2 percent YoY to 1,548 tractors, driven by stronger demand in Europe and Mexico. Notably, about 52 percent of these exports were routed through Kubota’s global distribution network, which helped widen market reach and improve overall efficiencies. The management remains upbeat and is targeting export growth of over 25 percent in FY26.

Update on greenfield plant

EKL is close to completing land acquisition for its greenfield facility in Uttar Pradesh, with transfer of land expected in FY26. Construction will begin in FY27, and commissioning is targeted for FY28–29. Phase I will add around 100,000 tractor units to its existing 170,000–200,000 capacity and will also integrate CE manufacturing.

The plant is expected to significantly lift exports, serving as a global sourcing hub, enabling entry into the US market, and supporting production of select Kubota global models from India.

Non-tractor revenue & machinery

Non-tractor revenue (spares, engines, implements) formed ~17 percent of agri machinery sales and grew ~29 percent YoY, outperforming the core tractor business. EKL expects this segment’s contribution to rise as tractor growth normalises. The management remains confident about sustained demand for harvesters and mechanised implements. In harvesters, the company holds ~30 percent market share.

Construction segment still struggling

The CE business, which accounts for about 12 percent of total revenue, continues to face weak demand and is significantly underperforming the broader industry. Capacity utilisation remained low at just 30 percent in H1FY26. However, the management expects a gradual pickup in CE demand from mid-Q3FY26, supported by the government’s infrastructure momentum. They remain optimistic that margins will improve to high single digits in the second half, driven by volume recovery and softer input costs.

Outlook & valuation

With the GST (goods and services tax) rate cut improving sentiment, the management has revised its tractor industry growth outlook for FY26 to low double digits, up from its earlier mid-single digit guidance. While EKL saw mild input cost inflation sequentially, it expects deflationary trends in Q3, which should support margin recovery.

However, Escorts’ persistent market share erosion remains a concern. The company lost another 60 bps in 1HFY26, slipping to 10.9 percent (from 11.5 percent in 1HFY25) amid intensifying competition.

Although synergy benefits with Kubota should play out over the medium to long term, valuations at 31.1x FY27E P/E already price in much of the upside. We recommend accumulating the stock on meaningful dips to participate in its long-term structural growth story.

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