Hold Escorts Ltd For Target Rs.1,600 - Emkay Global
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In-line EBITDA; company remains a potential acquisition target; Hold
* Q2FY22 EBITDA declined 30% yoy to Rs2.1bn, in line with our estimates. Revenue fell 1% to Rs16.6bn, above our estimate of Rs16bn, due to higher realizations in the Agri segment. Construction Equipment (CE)/Railways revenue rose 59%/6% to Rs2.5bn/ Rs1.7bn, while Agri revenue declined by 6% to Rs12.4bn.
* Tractor outlook is subdued for H2FY22 on account of a high base of last year. Rural sentiments have been temporarily affected by erratic rainfall in Sep’21, leading to delays in harvesting. Going forward, sentiments should improve on the back of healthy Kharif crop output and expectations of good Rabi crop output due to high reservoir levels.
* ESC is a potential acquisition target owing to a low promoter stake (13%), large cash reserves (~Rs30bn) and rising shareholder activism. ESC can benefit from a takeover by a company like Kubota in terms of technology support, access to a global sales network and opportunity for component manufacturing. Kubota could benefit from gaining access to the Indian Tractor and CE markets.
* Despite a cyclical downturn in the Agri segment, we expect an 8% revenue CAGR over FY21-24E, aided by 21%/17% growth in CE/Railways. We also expect an 8% earnings CAGR. We continue to value the business at a 13x core P/E plus Cash (total Rs1,325) but now apply a 20% acquisition premium, which yields our Dec’22 TP of Rs1,600 (earlier Rs1,275). Maintain Hold.
Q2FY22 earnings above estimates: Revenue fell 1% yoy to Rs16.6bn, above our estimate of Rs16bn, due to higher realizations in the Agri segment. Agri segment revenue fell 6% to Rs12.4bn due to a 14% decline in volume and 9% growth in realization, while EBIT margin contracted by 500bps to 15.1%. CE revenue grew by 59% to Rs2.5bn, led by volume growth of 31% and realization growth of 21%, while EBIT margin expanded by 190bps to 3.6%. Railways revenue grew by 6% to Rs1.7bn, while EBIT margin contracted by 300bps to 17.3%. EBITDA margin contracted by 570bps to 12.6%, below our estimate of 13.2%, due to lowerthan-expected margins in CE and Railways. EBITDA declined 30% yoy to Rs2.1bn, in line with our estimates. Overall, adjusted PAT declined 23% to Rs1.8bn, above our estimate of Rs1.7bn, due to higher other income (up 70% to Rs639mn).
ESC remains a potential acquisition target. Global OEMs such as Kubota can benefit by acquiring ESC in terms of gaining access to the Indian Tractor and CE markets. The Indian tractor market is a widely distributed market where ESC has a strong brand and distribution network (1,100+ outlets). The long-term goal (2030) of Kubota is the realization of ‘Global Major Brand Kubota’, and to achieve this target, Kubota has been focusing on building nextgeneration growth drivers through collaborations and acquisitions (Exhibit: 10). Kubota’s netdebt-to-equity ratio stands at -0.3x and FCF for H1CY21 at US$0.9bn, excluding financial services.
Maintain Hold: We continue to value the business at a 13x core P/E plus Cash (total Rs1,325), but now apply a 20% acquisition premium, which yields our Dec’22E TP of Rs1,600 (earlier Rs1,275).
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