Escorts – Reduced Application Advice – HDFC Securities



Mr. Aditya Makharia, Institutional Research Analyst, HDFC Securities

Escorts reported 4QFY21 PAT of INR 2.7 billion (-3% QoQ). However, the outlook for the tractor industry is uncertain, with direction guiding low to mid single-digit growth in FY22E as demand in the major pre-monsoon season has been affected by COVID. We are lowering our estimate of tractor volume growth for fiscal 22E to 2% year-on-year (from 8% earlier). Our target price is lowered to INR 1,300, as we now value the share at 14x (up from 16x earlier), in order to take into account the drop in demand after a strong fiscal year 21 (sales increased by + 24% over one year).

Financial data 4QFY21: (1) Tractor volumes at 32.6k units increased by 3% QoQ (+ 62% YoY). The average achievement at INR 678k increased 6% of QoQ, resulting in 10% revenue growth. The EBITDA margin of 15.6% (-245 bps Q / Q) was impacted by the increase in raw material costs (66% of sales vs. 62/66 YoY / ToQ). (2) The EBIT margin for the Agri / ECM / RED segment stands at 17.0 / 7.3 / 19.1% (-300 / – 30 / + 650 bps QoQ). (3) Escorts’ PAT, at INR 2.7 billion, decreased by 3% QoQ.

Key Highlights: (1) Lower Forecast: Despite favorable macroeconomic drivers in the tractor industry, volumes will likely be affected by the current COVID situation and a higher FY21 base. Guided management for low growth single digit average for the entire tractor industry. (2) Pressure on raw material costs: margins are affected by the sharp rise in input costs. Management expects further inflation on material costs. To compensate for the above, the company took two price increases in mid-November 20 and April 21 totaling 5%; and another can be expected in 2QFY21. However, even after passing on the higher costs, margins are likely to be affected by 100 to 150 basis points. (3) Non-agricultural segment: the sector could experience an increase in purchases from the infra / non-agricultural segment as the economy opens up. This segment will likely represent 30-35% of sales in FY22, compared to 20-25% in FY21. (4) Kubota JV: Escorts started exporting to the Kubota channel and entered four markets (plans to open more markets this year). ~ 5,400 units were produced last year from the JV.

ESCORTS LTD. was the last trade in the BSE at Rs.1141.4 from the previous close of Rs. 1164.75. The total number of shares traded during the day was 186,318 in more than 11,944 transactions.

The stock hit an intraday high of Rs. 1,171.15 and an intraday low of 1,113.05. The net turnover during the day was Rs. 210,757,684.


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