Buy Escorts; target of Rs 290: Karvy

Escorts delivered strong Q1FY17 performance with its operating margin coming way above our as well as street’s estimates. Its EBIDTA margins increased by 236 bps YoY and 353 bps QoQ to 8.3% as against our estimate of 7%, benefitted by lower RM cost and control on other expenses. Its Revenues/EBIDTA/Adj PAT increased 9.4%/52.4%/46.2% YoY and 30.7%/126.2%/69.7% QoQ to Rs10.5bn/Rs878mn/Rs514mn vis-à-vis our estimate of Rs10.7bn/Rs749mn/Rs524mn in Q1FY17. Its tractor volume grew by 10%YoY and 38.4% QoQ, while construction equipments’ volume grew 45.5% YoY and 0.3% QoQ in the quarter. It has booked extra ordinary expense of Rs 63mn towards VRS expenses. Healthy tractor volume, cost cutting initiatives and strong performance of railway equipment segment are the key reasons behind margin expansion and healthy bottom line. Lower non operating income and higher tax rate restricted growth in bottom line to some extent.    

We broadly maintain our volume and revenue estimates, while factoring cost saving from RM cost and other measures, we increase our EBIDTA margin estimates and raise our EBIDTA estimates by 20%/11% for FY17E/FY18E. However, due to higher tax rate nullifying benefit of higher EBIDTA, we maintain our EPS estimates FY17E/FY18E and we maintain our target price of Rs 290, valuing the stock at 12.5x FY18E EPS. In view of expected recovery in tractor industry over next two years, we reiterate our “BUY “on Escorts. For all recommendations, click here Disclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.