Chola Wealth Direct rates this multibagger stock outperformer, buys for a target price of Rs 1970

Stock market outlook

The current market price (CMP) of Orient Cements on NSE is Rs 1778.05 each. On Friday, shares fell 1.42% from their previous close. The 52-week low of the stock is Rs 1183.20 each recorded on 23 August 2021, and the 52-week high is Rs 1934 each recorded on 05 April 2022.

The market capitalization of the stock is 23,414.84 crores. The ROE is 9.69%. The TTM PE ratio is 33.50. The PB ratio is 3.08. TTM EPS is 52.97. The dividend yield is 0.39% and the face value is Rs 10.

Returns on investment

Returns on investment

Last week, shares of the company jumped 5.55%. Over the past month, stocks have jumped about 1.1%. Over the past 1 year, it has returned 44.29%. Over the 3 and 5 years, the shares gave a multibagger return of 282.1% and 183.13%, respectively.

    1QFY23

1QFY23

Escort Kubota‘s consolidated revenue for the first quarter of FY23 amounted to Rs 20.3 billion (+19.4% YoY/+8.2% YoY) in a context of moderate growth in the volume of tractors and pressure on prices. EBITDA margin plunged to 10% (-390 bps YoY/-280 bps QQ), the lowest of the last 10 quarters. The decline in margin is largely due to RM cost inflation. Furthermore, the unfavorable product mix and the drop in market share weighed on the margin. The loss of market share is likely to force the company to restore it while giving up the margin profile. The late slowdown in RM inflation will provide respite for margins in the coming quarters.

The PAT fell to Rs 14.6 billion (-21.2% YoY / -26% QoQ). Escorts lost market share by 140 bps year-over-year. Tractor sales posted marginal growth of 3.3% year-on-year (+22.4% year-on-year) to 26,797 units. Railway equipment revenue increased by 0.3% to Rs 1.7 billion. Sales of construction equipment rose 59.4% year-on-year (-24.9% quarter-on-quarter) to 966 units. Rising sales of low horsepower tractors disrupted the product line, which ultimately weighed on overall performance.

Revenue from the agricultural machinery segment increased by 12.6% year-on-year and 16.42% quarter-on-quarter to Rs 16 billion. The EBIT margin fell to -496bps YoY and -484bps QoQ. The construction equipment segment recorded a mixed performance with a 74.5% year-on-year revenue increase. The place rose to Rs 1.7 billion with the railway equipment segment. The order book of railway companies almost doubled QoQ to Rs 8.5 billion against Rs 4.4 billion in Q4FY22. Management expects double-digit FY23 revenue growth.

Merger

Merger

The process of merging the company with Kubota India operations is underway and management expects to finalize the outlines of the agreement in about a month. Competitor inventory should be a few weeks higher while Channel inventory for Escorts remains under control at 1 month. Escorts recorded its highest quarterly export sales at 2.2k units, with over 20% of export volumes and nearly 70% of exports to Europe through the Kubota channel. 

Management commentary

Management commentary

Management expects the domestic tractor industry to grow in the low to mid single digits. The coming quarters will not see any relaxation in demand, as the factors influencing demand are strong. With uneven monsoon affecting business in Bihar, UP and parts of MP, forecasts suggest it will catch up. Reservoir levels suggest that water availability is very good across the country. This indicates that a bad monsoon might not affect this year but next year.

Management expects margins to start improving from 2QFY23, driven by the 2% price increase taken so far and a slowdown in commodity prices. Current raw material prices indicate that the company can benefit from lower steel prices in the 2nd quarter despite a probable inflationary impact on the cost of conversion.

Buy for a target price of Rs 1,970

Buy for a target price of Rs 1,970

The outlook for agricultural demand is gradually improving, which will benefit the company. The revival of rural consumer sentiment driven by normal monsoon expectations is likely to help volumes. Weak EBITDA margin performance is expected to persist and remain a major concern. The loss of market share could force the company to neglect margins in the short term. At CMP, the stock is trading at a P/E of 23.5x and 20.3x its FY23 and FY24 EPS on our revised estimates. We are revising our rating on the stock to OUTPERFORMER with a target price of Rs 1,970. Risks: Loss of market share, pressure on input costs, uncertainty on the tractor cycle.

Comments are closed.