Escorts Report Moderate Growth in Volumes and Financials in FY22

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Escorts Ltd – one of the largest tractor manufacturers in the country – could report a small single-digit increase in volumes in FY22 due to the impact of second wave of covid in rural areas and the high base of last year. The continued increase in raw material prices will also have a negative impact on the company’s operating margins.

However, management expects a strong recovery in sales after the freeze as FY22 crop production will continue to be robust.

“While all macro / agricultural economic indicators and availability fund positively, the impact of the Covid-19 pandemic in rural India may act as a shock absorber. Currently, two-thirds of dealerships are closed or open for limited hours. Therefore, management expects mid-digit FY22 industry growth, ”Motilal Oswal analysts said in a report.

“We reduced our earnings per share for fiscal years FY22E / FY23E by 9% / 7% to account for lower volumes and higher raw material costs. We are lowering our multiple P / E target to 14x (from 15x earlier and with a premium to its five-year average of 12.4x) to account for cyclical profits near the peak in FY23E, ”they added.

Escorts reported a sharp 128% increase in year-over-year net profit at 285.40 crore on Substantial Growth in Tractor, Construction Equipment and Railway Machinery Segments The Company reported net profit of 128 crore in the period of the previous year.

Total operations revenue in the quarter also jumped a whopping 60.8% to 2229 crore as a result of Tractor sales jump 62% to 32,588 units. The company’s operating profit or profit from interest, taxes, depreciation and amortization (EBITDA) jumped 88.9% to 344 crore, while operating margin increased 230 basis points to 15.4% due to the rigorous cost reduction methods adopted by the company.

Since the economy was unlocked from May of last year, tractor sales have rebounded faster than expected due to the lower impact of Covid-19 in rural areas and government incentives have helped protect agricultural income. A bumper summer harvest also helped boost tractor sales.

According to Emkay Global analysts, in addition to the high base, a deeper impact of Covid-19 in rural areas, weaker support from state government subsidies and stocks from large dealers are expected to impact wholesale sales. Domestic tractor volumes are near the peak and could see a 7% CAGR drop in fiscal year 21-23E.

“We are forecasting a low 4% CAGR in sales in fiscal years 21-23E, despite 19% / 13% growth in construction equipment / railways, due to weakness in the Agri segment. We expect earnings growth to be weaker at a 1% CAGR in fiscal 21-23E. We are lowering the rating to Hold with a revised TP of Rs1,240 (previously Rs1,500), based on a basic P / E of 14x on FY23E (16x earlier), ”added analysts.

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