Buy Escorts Ltd For Target Rs.1,500 - Emkay Global
Strong operational performance; maintain Buy
* Q3FY21 EBITDA margin expanded by 510bps to 18%, above the estimate of 14.9% mainly due to better gross margin and cost savings. OPM is expected to taper ahead, owing to commodity inflation and increase in marketing spends.
* FY21E revenue is expected to grow 12% to Rs64.8bn, led by robust growth in Tractors. Despite tapering of growth in Tractors, double-digit growth (11% CAGR) is likely to continue over FY21-23E, led by growth of 23%/15% in Construction Equipments /Railways
* We upgrade FY21-23E EPS by 4-9%, owing to higher volume and margin assumptions. Following this revision, we expect an 11% CAGR in EPS over FY21-23E with average ROCE of 22% and FCF of Rs4.4bn/year.
* We await details of new investments of Rs10bn in tie-up with Kubota, which should provide triggers for medium-term growth. Retain Buy rating with a TP of Rs1,500 (Rs1,442 earlier), based on 16x FY23E core EPS.
EBITDA margin above estimates:
Revenue grew 24% yoy to Rs20.1bn (est.: Rs21.1bn), slightly below estimates due to lower-than-expected Tractor realization and Railway revenues. Agri segment revenue grew 28% to Rs16.5bn, led by volume growth of 26% and realization growth of 2%. CE revenue grew 13% to Rs2.4bn, led by volume growth of 20% and realization fall of 6%. In comparison, Railways revenue declined 6% to Rs1.2bn. EBITDA margin expanded by 510bps yoy to 18% (est.: 14.9%), above estimates, owing to higher gross margin and cost savings. EBIT margin for Agri/CE segments expanded by 560bps/270bps to 20.1%/7.5%. Railways segment margin contracted by 570bps to 12.7% due to higher share of import content (due to increased share of new products) and one-time GST provision impact. Overall, adjusted PAT grew 83% to Rs2.8bn (est.: Rs2.4bn), led by higher operating margin and other income (up 77% to Rs472mn).
Retain Buy:
FY21E revenue is expected to grow 12% to Rs64.8bn, led by robust growth in tractors. Despite tapering growth in Tractors, we expect double-digit revenue growth (11% CAGR) to continue over FY21-23E, led by growth of 23%/15% in CE/Railways segments. Earnings growth should be similar at 11% CAGR during FY21-23E. In addition, we await details of new investments of Rs10bn in tie-up with Kubota, which could relate to new product development, component manufacturing and exports, among others, and should support growth over the medium term. Retain Buy rating with a TP of Rs1,500 (Rs1,442 earlier), based on 16x FY23E core EPS. Key downside risks include a deficient or weak spread of monsoon, delay in macro recovery, rise in competition, and adverse movement in currency/commodity prices.
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