In-line; Outlook positive; Near-term supply side issues remain
Recovery expected from 2QFY21, which is largely priced in
* Escorts’ (ESC) 4QFY20 adjusted performance was in line. Unlike other auto segments, the tractor industry faces no material demand side issues and is expected to see much faster recovery from 2QFY21.
* We upgrade our FY21/22E EPS estimates by ~3%/2%, but maintain our Neutral rating as the positives seem to be priced in.
Higher production boosts margins due to better fixed cost absorption
* ESC’s 4QFY20 revenues/EBITDA/PAT grew -15%/2.5%/16% YoY to ~INR13.8b/INR1.9b/INR1.4b. While FY20 revenue/EBITDA/PBT declined 7%/8%/11%, PAT grew 1% due to lower tax.
* Tractor volumes declined ~20% YoY but net realizations improved ~7.5% YoY (+2.3% QoQ) to ~INR526.4k (v/s est. ~INR516.6k) due to a better mix. Domestic tractor market share declined by ~20bp to ~11.6% in FY20.
* EBITDA margins expanded 250bp YoY (+110bp QoQ) to ~14% (v/s est. 12.1%) driven by better mix, cost savings and higher production (lower fixed cost as % of sales). This impact would reverse in 1QFY21.
* Tractor business PBIT margins improved 270bp YoY (+135bp QoQ) to ~15.8%. CE business PBIT margins declined ~280bp YoY (-55bp QoQ) to ~4.3% due to volume decline of 32% YoY, partially offset by better mix. Rail business PBIT margins declined ~110bp YoY due to adverse product mix.
Highlights from management commentary
* Tractor industry should witness pent-up demand, which would reflect in Jun-Oct’20 sales. Industry is expected to return to normalcy by Jul’20; however, ESC plans to wait till 2QFY21 before providing FY21 outlook. We are building in tractor volume growth of ~3%/12% for FY21/22E.
* ESC has started operations from 13th May’20 and is operating at 20% utilization, which is expected to reach 50% by Jun’20 and turn near-normal by Jul’20. However, it has adequate inventory to tide through till endJun’20. Almost 65%/90% of its dealerships/workshops is operational now.
* Financing is easily available as banks have increased focus on the agriculture sector. ~40% customers in tractor financing have availed moratorium.
* ESC’s Railways business should grow at 15% in FY21 as it has an order book of ~INR4b, which would be executed over the next 12-15 months. It is the only Indian company to get an approval for prototype of Microprocessor Controlled Brake System and has now started field trials. It expects to commercialize it in FY22E.
Valuation and view
* We are upgrading our EPS estimates by 3%/2% for FY21/22E as we tweak our volumes for tractors and growth for other businesses. Our estimates are yet to factor in the benefits from its partnership with Kubota.
* Valuations at 15.4x/12.4x FY21/22E consol. EPS largely reflects the expected recovery. Maintain Neutral with TP of INR768 (~12x Mar’22E consol. EPS, in line with 5-year average P/E).
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