Buy Escorts Kubota; target of Rs 2450: Emkay Global Financial

Emkay Global Financial's research report on Escorts Kubota

Q2FY23 EBITDA declined by 33% YoY to Rs1.53bn, coming in 22% below our estimates due to increase in vehicle discounts and cost pressures. Management expects margins to normalize over the next few quarters, owing to reduction in discounts, commodity deflation, price increases and cost savings. Revenue grew by 12% YoY to Rs18.8bn, in line with our estimates. Factoring-in the lower-margin assumptions, we reduce FY23-25E EPS by 6-9%. Escorts remains one of our top sector-picks, underpinned by expectations of a Tractor-industry upcycle and robust medium-term prospects. Led by support of new Joint Promoter Kubota, we expect Escorts to clock 20% revenue CAGR in the next 5 years, backed by: 1) enhanced market presence in the domestic tractor market, with expansion of the product portfolio, especially in wetland applications; 2) improved market positioning in Construction Equipment (CE) on widening of the product portfolio, especially in excavators; 3) increased exports by leveraging Kubota’s global distribution network; and 4) commencement of component exports to meet Kubota’s global requirements.

Outlook

We reaffirm BUY with TP of Rs2,450/share (Rs2,500 earlier), based on 25x Dec-24E core EPS (Sep-24E earlier) and cash at Rs397/share (0.80x book).