Tractor-maker Escorts share price that has climbed more than 46 percent in the last three months is expected to gain 15 percent more, a report by research firm Sharekhan has said.
Japan’ Kubota Corporation will raise its stake in Escorts to 14.99 percent through a preferential issue aggregating to Rs 1,872 crore further cementing its place in India, the world’s largest tractor market. The joint entity intends to attain global leadership in the farm-equipment sector.
The Osaka-based Kubota will subscribe to new equity share proposed to be issued by Escorts and shall become a joint promoter along with the Nanda family.
The Nanda family would not be selling any shares in this deal, a release from Escorts said. The transaction is subject to shareholder and regulatory approvals.
The name of the company shall be changed to Escorts Kubota Limited. Kubota, which has interests in tractors, earth movers and engines, will also make an open offer to the shareholders of Escorts to acquire up to 26 percent of the company’s share capital.
The open offer will be made at the same price as the preferential issuance of Rs 2,000 a share. Kubota’s stake in Escorts will increase to 44.80 percent after the open offer.
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Brokerage firm Sharekhan has a positive outlook on Escorts and expects a 15 percent upside.
The partnership with Kubota would provide the company an opportunity to gain market share in the medium term, driven by product launches across brands and increase the addressable market.
Escorts is also strengthening distribution network in opportunity markets of south and west and its dual distribution model in strong markets of north and central India, it said.
It will also leverage its captive financing arm to gain market share. The tie-up would provide multiple synergies in new product development, distribution network and raw material sourcing, the research firm said.
"We believe the proposed deal to be positive for Escorts and provide an opportunity to improve on its technologies, widen product portfolio, increase revenue streams and enhance geographical presence. The stock trades at a P/E multiple of 18.6x and EV/EBITDA of 16.5x on FY23E earnings," it said.
Sharekhan, however, sees an erratic monsoon and COVID as risks for tractor demand. "If the monsoon is erratic, it can have a significant impact on tractor demand. In addition, prolonged COVID-19 infection in India would impact economic growth and consequently construction equipment segment demand," it said.
Motilal Oswal remains cautious on the tractor cycle. It values ESC at 18x (15x earlier; in line with target PE multiple for M&M’s tractor business) and maintains a “neutral” rating with the target of Rs 1,700 a share.
At 10:58 hours, the stock was trading at Rs 1,794.50, down Rs 8.40, or 0.47 percent. It has touched a 52-week high of Rs 1,829.60.
The scrip touched an intraday high of Rs 1,829.60 and an intraday low of Rs 1,775.
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