Buy Escorts; target of Rs 867: SPA Securities

SPA Securities' report on Escorts

We recently met CFO of Escorts Ltd. (EL), which is the fourth-largest player in the tractor segment in India (after Mahindra & Mahindra Ltd, Tractors and Farm Equipment Ltd. and Interactional Tractors Limited) with a market share of 11%. The Farm Equipment (EFE) division which contributes 79% to the top line, offers a wide range of tractors- 10-75HP- primarily under the Farmtrac, Powertrac and Steeltrac brands. Construction and material handling equipment (15% of revenue) and railway equipment (6% of revenue) are other businesses that company operates.

Outlook

Looking forward, we expect EFE/ECE volumes to grow at 14.6%/ 21.9% through FY18-20E. We expect EL's revenue/EBITDA/PAT to clock a growth of 15.6%/23.8%/24.8% through FY18-20E. EBITDA margin of EL is expected to expand from 11% in FY18 to 12.7% in FY20. At CMP of 664, the stock is trading at 15.3x its FY20 EPS. We recommend buy with a TP of INR 867 in 12-18 months, 20x its FY20 EPS.