Buy Escorts; target of Rs 1048: Cholamandalam securities

Cholamandalam Securities' research report on Escorts

 In 4QFY18, Escorts reported strong set of numbers. Revenue grew by 40.5%YoY to INR 14,361mn led by robust volume growth in both Agri Machinery (57.4% YoY) and Construction Equipment (48.6% YoY).  Escorts Agri Machinery revenue grew by 36.5% YoY to INR 10,941mn. Construction segment revenue grew by 44.5% YoY to INR 2,660mn, while Railway Equipment Division revenue grew by 14.2% YoY to INR 760mn. EBITDA grew by 134% YoY to INR 1,738mn. EBIDTA margins improved sharply 480 bps YoY to 12.1%.  Agri segment EBIT margins improved 500 bps YoY to 15.1% driven by operating leverage due to strong volume growth and cost control initiatives, Construction equipment segment EBIT margins improved 300bps YoY to 5.1% driven by operating leverage and increased localization measurers and Railway segment margin improved by 508bps YoY to 15.9%. Net profit grew by 153% YoY to INR 1,125mn, aided by higher other income.  For FY18, revenue grew by 20.4% Yoy to INR 50.2bn. EBITDA grew by 72.1% YoY to INR 5.6bn and PAT grew by 115% YoY to INR 3.4bn. Agri Machinery volume grew 26.1% YoY to 80,417 units, while Construction volume grew by 35.3% YoY to 4,486 units. Company’s Agri Machinery market share increased by 26 bps YoY to 11% in FY18.

Outlook

At CMP, the stock is trading at P/E of 16.6X/13.3x on FY19E/FY20E EPS, respectively. We arrive at a revised price target of INR 1,048 based on P/E of 16x FY20EPS and upgrade the stock a BUY (earlier OUTPERFORMER). Risks: Slow pace in infrastructure spending, delay in agriculture subsidies by the Government.