Buy Escorts Ltd For Target Rs.1577 - SPA Securities
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Escorts Ltd. (EL) reported net sales of INR 20.1 bn in 3Q FY21 (~23.5% increase over INR 16.3 bn YoY) and a PAT of INR 2.8 bn (up 83% YoY). Escorts Farm Equipment (EFE) segment volume increased 25.7% while Escorts Construction Equipment (ECE) segment volume a increased 20.1%. EBITDAM (excluding other income) improved by 505 bps YoY (-30 bps QoQ) on the back of improving product mix, benign commodity prices and various cost cutting measures and positive operating leverage and. RM cost as % of sales decreased 118 bps while Operating & Manufacturing Expenses decreased 247 bps while employee expenses as % of sales decreased 140 bps.
Nationwide unlock following pandemic of Covid19 pushed volumes in both EFE and ECE.
EFE domestic volume increased 24.2%. Escorts exports registered a growth of 67.4%. Market share in the quarter stood at 11.6% (down 24 bps YoY, up 183 bps QoQ) primarily on the back of supply side constraints. Utilization for the quarter stood at more than 100%. ECE volume increased 20.1% YoY (up 52.7% QoQ). The company has lost market share in the segment by 173 bps. Revenue from EFE/ECE segments stood at INR 16.5 bn/2.4 bn increasing 28%/13%. Revenue from Railways stood at INR 1.2 bn (down 5.7% YoY) while order book for the segment Shrunk significantly as the pandemic affected fresh order tendering and inflow. We expect the orderbook to normalise in FY22.
EBITDAM improved by 505 bps YoY on the back of improving product mix, benign commodity prices and various cost cutting measures and positive operating leverage
EBITDAM (excluding other income) improved by 505 bps YoY (down 30 bps QoQ). EBIT margin in EFE improved 564 bps YoY (up 11 bps QoQ) to 20.1% on the back of improving product mix, benign commodity prices and various cost cutting measures. Although the part of margin improvement is not sustainable, we expect EBIT margins to settle near 16-17% level going ahead. ECE division reported EBITM of 7.5% (up 270 bps YoY, up 580 bps QoQ). Cost reduction measures and improving product mix has reduced breakeven levels for the segment. Railway equipment division reported EBITM of 12.7% (down 574 bps YoY, down 763 bps QoQ) for the quarter but margins are expected to stabilize at 17-18% as the dent was primarily due to Higher share of NPD products with lower margins and one-off provision towards GST rate differential in respect of orders executed post Sep'19.
Other highlights
In Q3, Tractor industry grew 27%, led by 13% growth in North & Central regions and 44% in South and West regions. In comparison, Escorts grew 24% yoy. Escorts market share has increased in 40-50HP segment, but declined in 30-40HP segment. The supply side situation is normalizing and is no longer expected to be a bottleneck for meeting demand. Escorts has been exporting Electric Tractor to Europe since 2019, and has now started exports to US. In India, the product launch is expected in 3-6 months. FY22 Outlook: Volume to see positive growth, but quantum of growth depends on whether monsoon is normal and well distributed. Growth could be limited by a high base. Over long term, South and West regions are expected to outpace the North region. Escorts is working toward strengthening position in these regions, where it currently has lower share. Exports are expected to grow by 3-4x over 7-8 years due to increased penetration in overseas markets. In addition, the use of Kubota global network will also aid penetration.
Outlook and Valuation
Tractor industry remains relatively well placed in current environment. We expect Escorts to continue to gain market share in the tractor segment on the back of inroads in the South and West markets and the benefits from the Kubota. We also expect improvement in margins aided by improving product mix, increasing localisation and benefit of operating leverage. We expect Revenue/EBITDA/PAT to grow at a CAGR of 13.4%/32.9%/ 36.5% from FY20 to FY22E. At CMP of INR 1334, stock is trading at 13.1x its FY22E earnings (vs average of 20.8x for last 5 years). We Recommend Buy with a revised fair price estimate of INR 1577 in 12 months, 15.5x its FY22E EPS.
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