ICICI Direct is bullish on Escorts has recommended buy rating on the stock with a target price of Rs 1020 in its research report dated May 21, 2020.
ICICI Direct's research report on Escorts
Escorts is a prominent tractor player domestically with market share in excess of 11%. The company’s brand of tractors is particularly strong in the northern as well as the eastern belt of India. With rural India relatively less impacted due to Covid-19, record food-grain procurement by government agencies as well as expectation of normal monsoon 2020, we expect the tractor industry to outperform the larger automobile space in FY21E with Escorts a key beneficiary. Escorts in the recent past has also entered into a strategic partnership with Kubota Corporation of Japan (one of the global leaders in farm machinery and implements), which provides further visibility of growth for the company, going forward. On the b/s front, Escorts is a net cash company thereby holding surplus cash on books (~Rs 1,000 crore as of FY20) and also realises healthy return ratios matrix (RoCE at ~20% in FY20), thereby making a compelling case for an upgrade to BUY.
We derive comfort over long term growth prospects amid its healthy B/S and capital efficiency. Therefore, we upgrade the stock to BUY. We value Escorts at Rs 1,020, on SOTP basis, assigning 18x P/E to its core FY22E EPS and ascribing 25% holdco discount to its treasury shares in books.
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