Neutral Escorts Kubota target of Rs 2001: YES Securities

YES Securities' research report on Escorts Kubota

Escorts Kubota (EKL) 4QFY23 results surprised positively where it exceeded our/street EBITDA/ Adj. PAT estimates by ~26%/22%. The entire beat is attributed to better than expected gross margins at 28.5% (est 26.2%, +300bp QoQ/ -140bp YoY). This led to ~24% QoQ growth in EBITDA at Rs2.35b (est/cons at Rs1.87b/Rs1.92b) with margins at 10.8% (est 8.7%, +240bp QoQ/ -270bp YoY). Tractors (71% EBIT contribution) ASP grew 1% YoY (+3.2% QoQ) at Rs628.9/unit with EBIT margins expanding ~160bp QoQ (-560bp YoY) at 9.9%. The management guided for fast normalcy in tractors EBIT margins to a normalized level of 14-15% towards end of FY24E, driven by further decline in RM expected, + product mix, recent price hikes and ongoing cost control measures. We think this would not be easy but challenging as well given low-mid single digit volume growth expected for the domestic tractor industry. We believe, EKL is more vulnerable v/s peers as i) it derives >75% of its revenues from FES segment and ii) aggressive expansion plans by Sonalika, TAFE, John Deere, etc. to keep tight balance between market share and margins priorities. The valuations at 21x/17.4x FY24/25 do reflect anticipated market share expansion and synergies post Kubota integration. We believe, benefits arising out of Kubota JV to start reflecting meaningfully only over ~2 years.

Outlook

We raise FY24/25 EPS by 13.6%/5.7% to factor in sharper than expected RM decline. We maintain Neutral on the stock with TP of Rs2,001 (earlier Rs1,892). We continue to value co at 17x Mar-25 EPS. We build in revenue/EBITDA/PAT CAGR of 9%/32%/35% over FY23-25E.

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