Buy Escorts Ltd For Target Rs.2,200 - ICICI Direct
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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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