Dolat Capital's research report on Escorts
Escorts (ESC) delivered a decent operating performance in Q1FY21 amid a tough environment. EBITDA de-grew 16% YoY to Rs 1.19bn (vs est Rs 1.13bn). EBITDA margin improved 125bps YoY to 11.3% led by better product mix (higher HP tractor) and cost control initiatives. Revenue declined 25.4% to Rs 10.61bn led by 12.7% decline in Agri-machinery products, 75% in construction equipment and 53% in railway equipment. Management stated that the overall rural sentiment is positive because of the record output of Rabi crop and a good early monsoon. Tractor sales grew 22% YoY in June, led by a sharp 60% growth in the southern region. Despite weak Q1, the management expects lower single digit growth for the tractor industry for FY21. The company is operating at 50-60% utilization and is expected to scale up to full capacity by mid-August with smoothening of supply chain and labor issues. As rural demand and the agricultural sector are likely to be the least impacted by COVID-led disruptions with a quicker bounce back compared to the urban counterpart, we believe the tractor segment will outperform other automobile segments. In addition, re-stocking will also aid volume growth in the forthcoming months (overall system inventory stands at ~3.5 weeks which is 50% lower than normal level). Construction equipment and Railway division demand will also improve with revival in the macroeconomic scenario once the COVID-19 pandemic ebbs.
We estimate EPS CAGR of 24% over FY21-23E led by 11% growth in Agri-machinery business and 24% growth in other two segments. We roll forward valuation from FY22E to FY23E and value the stock Rs 1,279 (16x for FY23E EPS) and recommend Accumulate rating.
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