Buy Escorts Kubota Ltd For Target Rs. 2,330 - ICICI Direct
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Bottomed out margins, leveraging Kubota channel for exports amid long term growth plan…
About the stock: The company is a prominent tractor maker domestically (10.3% FY22 market share). It also serves domestic construction equipment, railways space.
* FY22 sales mix – tractors 77%, construction equipment 14%, railways 9%
* Past five year CAGR: 24.1%, 35.6% in EBITDA, PAT; cash positive b/s
Q2FY23 Results: The company reported a muted Q2FY23 performance.
* Total operating income was at | 1,883.5 crore up 13.3% YoY
* EBITDA margins for the quarter came in at 8.1%, down 190 bps QoQ
* PAT declined 40.5% QoQ to | 87.7 crore. It includes one-time exceptional loss of | 72.8 crore on account of impairment of investment in the JV Tadano Escorts India Pvt Ltd
What should investors do? The stock price has grown at ~24% CAGR in the last five years from ~| 700 in November 2017, vastly outperforming the Nifty Auto Index
* We retain BUY rating amid wider opportunity at play with Kubota coming on board as co-promoter and keenly await the medium term growth plan
Target Price and Valuation: Revising our estimates, we now value Escorts Kubota Ltd at SOTP-based TP of | 2,330 (25x P/E on core FY24E EPS; earlier TP: | 2,390).
Key triggers for future price performance:
* Leveraging Kubota channels for export, more global sourcing opportunity & expansion of product profile using expertise of new co-promoter i.e. Kubota
* Amid above normal monsoon 2022, healthy reservoir levels, upbeat farm income, we expect tractor volumes to grow at ~7.5% CAGR over FY22-24E
* Construction equipment (CE) and railways (RED) segments to perform well over FY22-24E amid pickup in economic activity and strong order book
* We expect sales to grow at a CAGR of 13% over FY22-24E, with consequent operating margins expected at 12.0% by FY24E
Alternate Stock Idea: Apart from Escorts Kubota, we like M&M in auto space.
* Focused on prudent capital allocation, UV differentiation & EV proactiveness
* BUY with target price of | 1,590
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