Buy Escorts; target of Rs 1057: Cholamandalam Securities

Cholamandalam Securities' research report on Escorts

ESC and Kubota Corporation, Japan’s biggest tractor manufacturer have announced their global joint venture to manufacture high end technology tractors for domestic and export geographies. ESC will hold 40% stake in this JV, which will enable it in leveraging Kubota’s technology and overseas distribution network, spread across 100 countries. As part of collaboration, Kubota will export ESC tractors through Kubota global distribution network in specific markets as mutually agreed. The management stated that South Africa, Turkey and ASEAN markets have been identified for exports in Phase I. Turkey is the 4th largest tractor market globally with a market size of USD3.5bn(2017). Currently, ESC is the smallest player in the export segment. In FY18, company exported ~2,000 Units compared to India’s export of 87,000 units. We believe that the JV would help plug this gap. Management has guided exports to grow at a CAGR of 40-50% over FY18-22 to export ~8,000 – 10,000 units.

Outlook

The management expects a 12%-15% growth in the domestic tractor industry for FY19.The domestic and export penetration which would be achieved through this partnership would further aid growth. At CMP, the stock is trading at P/E of 12.7X/10.6x on FY19E/FY20E EPS, respectively. We arrive at a price target of INR 1,057 based on P/E of 17x FY20EPS and maintain a BUY rating on the stock.