ICICI Direct's research report on Gladiator Stocks
In the year 2020, Escorts has emerged as the major out performer in the Auto space. It is currently in a secular up trend forming higher peak and higher trough in all time frame The entire up move since bottoming out in March 2020 (| 526) is well channelled signalling sustained demand at elevated levels. The stock has recently rebounded taking support near the lower band of the channel as can be seen in the adjacent chart. Hence provides fresh entry opportunity The stock earlier during May 2020 has resolved above a major falling supply line joining highs of May’18 (| 1017) and Feb’20 (| 915) signalling a structural turnaround and resumption of the long term up trend We expect the stock to continue with its up move and head towards | 1380 in the medium term as it is the 161.8% external retracement of the entire CY 2018-2019 decline (1017- 424) placed at | 1380 levels
Escorts Ltd (Escorts) has significant exposure to the rural economy through its tractor division where it is one of the prominent players thereby commanding domestic market share at ~ 11.6% as of FY20. We expect the tractor segment to stay largely unaffected by demand side issues being faced by the rest of the automotive industry amidst Covid-19 outbreak, courtesy stability in the outlook of rural incomes (on the back of good Rabi crop harvest, remunerative crop prices, healthy water table levels and normal monsoon 2020) and lack of regulatory disruption like BS-VI norms. Longer term demand drivers like the government’s continued focus on doubling farm incomes and improving rural infrastructure as well as underpenetrated nature of farm mechanisation in India stay intact. Escorts derives ~77% of its sales from the tractor segment with rest being constituted by construction equipment (~15% of sales) and railways (~8% of sales) Domestic tractor segment is outpacing rest of the automotive space by a wide margin after lifting of nationwide lockdown. July retail volumes are ~20% higher than pre Covid levels (vs. ~40% decline for the overall industry), and up ~9% YoY, ~33% MoM - showcasing the robustness of demand on ground.
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