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Robust growth prospects ahead

* We attended Escorts’ analyst meet, where the management re-iterated its robust mediumterm growth prospects. FY28 revenue target is at Rs227bn as against Rs72bn in FY22, implying a 21% CAGR, driven by: 1) amalgamation with Kubota JVs, 2) ramp-up of vehicle/component exports, and 3) continuing growth in domestic businesses.

* Profitability remains a key focus area with an FY28 ROE target of 18%+ as against 12% in FY22, led by better margins and asset turnover. Management also plans to increase dividend payout and do buy-backs by utilizing up to 40% of profits.

* Led by tractor sales upcycle and opening of new revenue streams due to the support of the new joint promoter, Kubota, we expect Escorts to report robust revenue/EPS CAGRs of 23%/21% over FY22-25E. Escorts remains one of our top picks in the sector.

* We increase our FY24-25E EPS estimates slightly by 1-2%, as we factor in the positive impact of the amalgamation of Kubota JVs. We reaffirm BUY with a TP of Rs2,500/share (Rs2,450 earlier), based on 25x Dec-24E core EPS and cash at Rs359/share (0.80x book)

Key takeaways from the analyst meet

Escorts’ targets (FY28): The company is focusing on leveraging strengths of Kubota (technology, quality, processes and strong brand in overseas markets) and Escorts (frugal manufacturing base, distribution network, and well-known brand in India) to achieve the following targets: 1) Aspiration is to increase total revenue to Rs227bn in FY28, implying a 21% CAGR. 2) Increased share of overseas business to 15-20% in FY28 vs. 7% in FY22. 3) EBITDA margin targeted at mid-teens. 4) Expansion of ROE to 18%+ in FY28 vs. 12% in FY22. 5) Expansion of ROCE (pre-tax) to 25-30% in FY28 vs. 16% in FY22

Agri segment’s targets (FY28): 1) The company aspires to become the second largest player in domestic tractors as a result of new products and network expansion. The company plans to expand its product portfolio by 1.5-3x across Farmtrac, Powertrac, and Kubota brands, targeting entry-level, mass, entry-level premium, and premium segments across regions. The company plans to focus on expanding its dealer network by 1.5x in the domestic market. The current network stands at ~1,400 outlets (Escorts at 1,100+ and Kubota at 300+). 2) The company aspires to become the largest player in exports, led by new products (product portfolio to be expanded by 2x), network expansion, and utilization of Kubota’s global network, especially in the US, Europe, Thailand, and Brazil. 3) The company is working towards becoming the largest player in combine harvesters/rice planters in the domestic market and the third largest player in farm implements.

Construction equipment segment’s target (FY28): The company is focusing on outpacing the domestic industry’s growth, driven by new products and doubling its distribution network. New products are expected across backhoe loaders, mini excavators, pick-and-carry cranes, and compactors. In addition, the company plans to improve exports by expanding its overseas network.

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