CD Equisearch's research report on Escorts Kubota
Escorts in involved in production of agri-machinery, construction and material handling equipment and railway equipment. Unabsorbed material price inflation - steel; tires; casting etc - coupled with adverse product mix resulted in Escorts posting EBIT margin of 8.3% in Q3, though flat QoQ but sharply down from 15.5% in Q3 of previous fiscal. Despite its tractors volumes now making a comeback after declining last fiscal, Escorts's published well-nigh 40% drop in its agri-machinery business EBIT to Rs 144.77 crs last quarter from Rs 238.66 crs in the same period a year back. With its construction equipment business reeling under the pressure of lower of take and entrenched raw material inflation and its agri machinery business stoked by margin pressures, Escorts overall post tax earnings de grew by 6.8% to Rs 180.82 crs in Q3 (this also includes one -time gain of Rs 12.50 crs on account of contract termination recovery from erstwhile Tadano JV. In November, EKL completed sale of its 49% stake in Tadano Escorts India Private Limited (TEIPL) to Tadano Limited, Japan for a consideration of Rs 0.01 crs. Modest increases in depreciation costs and decline in interest expenses barely helped prevent the carnage in earnings.
Outlook
Though amalgamation of Kubota JVs (Escorts Kubota Ltd, Pvt Ltd, and Kubota Agricultural Machinery India Pvt Ltd) would galvanize EKL's tractor market share by 3-4%, further gains could face no small friction due to barely fledgling stage of Indian tractor industry. Weighing odds, we assign “reduce” rating on the stock with revised target of Rs 1575 (previous target: Rs 1550) based on 20x FY24e earnings.
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