Escorts will double in two years: Rajen Shah

Escorts will double in two years, says Rajen Shah, CIO, Angel Broking.

Shah told CNBC-TV18, "Escorts is one of my old favourites and one of the reason why I like this stock at this point of time is that this stock helps you make a fortune every two years. Let me explain how, this stock was quoting in 2006 at about Rs 60, went up 200% to touch a level of Rs 180 in 2008, corrected almost 75% to about Rs 40-50 levels in 2009, again went up almost 400-500% to about Rs 245 levels sometime in November 2010 and again has corrected about 70% to current levels of Rs 73. So I think if you pick up the stock at the right time, you can end up making a fortune. I am very confident that in the next two years, I think it should easily double that is a bare minimum expect from this company."
He further added, "It is no small company, it is now going to be almost one billion dollar company in the next one year. Marketcap is at an amazingly low Rs 750 crore or so. Even if you add that I think the total enterprise value will work out to about Rs 1,300 crore or so which is in fact less than the value of the land on which the company’s factory is situated."
"They own about 100 acres of land at Faridabad and the price over there – it was revalued in 2009 at Rs 1,000 crore and even if you take a 50% appreciation in property prices, the value of the land is more than the current EV of the company, leave aside the one lakh tractor manufacturing capacity and the construction business. Both are likely to do well."
"It has been little disappointing in Q1, Escorts basically has October-September period. So Q1 was disappointing in case of Escorts but I think number of initiatives have been taken by the management and I think almost about 60 dealers have been appointed in the last six months in the southern part and the western part of the country because Escorts is not traditionally been a very strong player in the northern and the eastern market but south and west was not upto the mark."
"So I think they are pushing up the dealers over there and I think sells should improve significantly in the coming years. On a valuation basis, if you see, next year we are expecting about Rs 10 kind of earnings for Escorts. So this too on the merged equity, it is merging about three group companies, which will see equity capital going up to about Rs 117 crore and on this increased equity, we see the company report about Rs 115-120 crore of profits next year."
"So Rs 10 kind of earnings at 13-14 kind of P/E multiple, the stock is worth Rs 130-140 but the interesting point here we need to keep in mind is that the management recently picked up about 4-5% stake from the market and from Reliance Capital and post merger again the stake is going up from 37% to 41%. So if the management’s stake is going up by almost 9% in almost a year’s timeframe I think that gives you confidence that better things lie ahead for the company. So I think it is a no brainer Rs 150 stock, so have patience for two years and you are sure to end up doubling your money." Disclosure: We own Tips Industries and Escorts.