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Volume growth to continue, margins pressure to ease; retaining a Buy

For Escorts Kubota, tractor volumes continued to rise and the company sustained market share across regions. Under-recovery in RM costs and small price increases in the quarter led to pressure on the gross margin, which however is expected to improve in Q4. The ground situation for a gradual revival in the rural economy is in place and we expect better volume off-take ahead. Accordingly, we maintain a Buy at a revised TP of Rs2,360 (22x FY25e)

Market share sustained, volume growth to continue in FY24. The industry has crossed the earlier peak of FY22 against the expectation, at the beginning of the year, of ~5% growth in FY23. The industry registered 10% growth and EK grew similarly. This is on strong rural growth because of the kharif and rabi crops and a normal monsoon, which led to growth in industry. As a result, the industry has made a new peak in FY23. Ahead, we expect rural activity to be robust given the election period. Accordingly, we expect ~8% volume growth, given the high-base effect. Subsequently, for FY25, with expected emission norms, we expect some level of pre-buying of tractors.

For construction equipment, the recent budget’s focus on capital formation augurs well and we expect the division to clock a 10% CAGR over FY23-25. The Railways OB was Rs10bn and we expect a 15% CAGR over FY23-25. Accordingly, we expect overall growth of 11% in FY24 and 16% in FY25.

Better margins. The company raised prices ~1.5% in Nov’22 and the full effect is expected to reflect in Q4. There is still under-recovery of 1-1.5%, which we believe would be slowly passed on in subsequent quarters. Hence, we expect margins of 9.2% in Q4, 9.8% in FY24 and 10.8% in FY25.

Valuation. We expect a 14% revenue CAGR over FY23-24 and 23% earnings growth, leading to an EPS of Rs107.3. We maintain a Buy rating, at a revised TP of Rs2,360 (22x FY25e).

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