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Kubota takes a co-driver seat, now a joint promoter ...

About the stock: Escorts is India’s fourth largest tractor maker (11.3% FY21 market share) and also serves the domestic construction equipment, railways space.

* FY21 sales mix – tractors 82%, construction equipment 11%, railways 7%

* Past five year’s CAGR: 44.9%, 59.8% in EBITDA, PAT; cash positive b/s

Company Update: Escorts to issue 93.64 lakh equity shares via preferential allotment to Kubota at a price of ₹2,000/share with total inflow pegged at ₹1873 crore.

* Kubota’s shareholding in Escorts to increase from 10% to 16.4%. Kubota to launch open offer for minority shareholders of Escorts at ₹2000/share.

* Kubota will now be a joint promoter of the company.

* Company name proposed to be changed to Escorts Kubota Ltd.

* All existing JV’s proposed to be merged, thereby simplifying the structure

* Nanda family to retain its holding, Mr. Nikhil Nanda to continue as CMD

What should investors do? The share price of Escorts has grown 6x over last five years from ~| 300 levels in November 2016, vastly outperforming Nifty Auto Index.

* We retain BUY on Escorts with Kubota now a co-promoter with expectations of enhanced product offerings and increased global sourcing from India

Target Price and Valuation: We value Escorts at revised SOTP-based TP of | 2,200 (23x P/E on core FY23E EPS, 15% discount on treasury shares; previous TP | 1,900)

Key triggers for future price performance:

* New product launches in the farm mechanisation side (ex-tractors)

* Optimum utilisation of surplus cash on b/s (now nearly at ₹5,000 crore)

* Expect ~13% tractor revenue CAGR over FY21-23E (5.5% volume CAGR)

* Construction equipment, railways growth to be faster amid expected pickup in economic activity and positive outlook for user segments

Alternate Stock Idea: Apart from Escorts, in our auto OEM coverage we like M&M.

* Focused on prudent capital allocation, UV differentiation & EV proactiveness

* BUY with target price of | 1,125

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