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Accumulate for long term..

Escorts Ltd (EL) is the third largest Agricultural tractor manufacturer in India. It has strong presence in the north and west market, with an overall market share of 11.3% as on FY21.

* Q4FY21 revenue grew by 60%YoY largely on account of higher tractor sales of 62%YoY and 63%YoY from the construction equipment's segment.

* EBITDA margin expanded by150bps due to better product mix, price hike and cost reduction. PAT grew by 93.5%YoY.

* The government’s action towards improving the agricultural productivity through mechanization will continue to drive volume growth. However, due to the ongoing pandemic the government’s subsidy likely to be limited for the year FY22.

* Revenue & PAT to grow by 11%/12% CAGR over FY21-23E owing to better product mix , exports and Industry recovery.

* We expect the elevated commodity price and supply chain constraints to remain for short term. However, EL’s strategic initiative with Kubota for export will drive growth. We maintain our Accumulate rating and value EL at 16x on FY23E EPS.

Strong demand led to earnings growth..

Q4FY21 revenue grew by 60%YoY largely on account of higher tractor sales of 62%YoY and 63%YoY from the construction equipment's. Despite adverse commodity price, EBITDA margin expanded by150bps due to better product mix, operating leverage in all division, price hike and cost reduction. PAT grew by 93.5%YoY.

Revenue from railway segment grew by 36%YoY. We believe that the economy is going through a challenging time due to the sever impact of second wave and lockdown, impacting supply chain. However, Normal monsoon and farm mechanisation will continue to support volume growth post stabilisation. The company also expecting that the impact will be minimal both in the construction and railway segment due to government thrust for massive infrastructure projects.

JV with Kubota will expand geographical footprints.

EL’s expanded portfolio & technology upgrades in tractors have resulted in improved numbers both in existing and newer geographies. Exports have grown by 30%YoY in FY21 and expect the same trend to continue for FY22. Strategic collaboration with Kubota has lead to higher global footprint. Contract manufacturing of EL and Kubota products under the brand “E Kubota” is expected to commence by the next quarter with an outlay of 30000 capacity. On the domestic front, we are forecasting a moderation in the tractor volume growth in FY22E due to lower government subsidy owing to unprecedented situation. Despite lower farm tractor sales expected in HIFY22 , better product mix, higher export and growth in the non farm sector will drive revenue growth. We expect EL to register a revenue growth of 12%YoY for FY22E.

Margin to show some resilience at later half.

To offset the inflated commodity price, the company has taken 5% price increase in November & in April and also expected another one in Q2FY22. Despite subsequent price hike we expect the margin to remain under pressure for near term and expect to show some resilience in H2, owing to industry recovery and through operating leverage.

Valuations

Overall rural sentiments are positive because of normal monsoon and government intention to increase agricultural productivity. However, supply chain constrains & commodity price movement will have to be watch full. In addition, limited government subsidy for FY22 will hinder easy finance availability for farmers and hence we expect a consolidation in valuation. Looking at the long term perspective for doubling farmer’s income by the Govt. and infrastructure push will augurs well for the company. We value EL at 16x on FY23E EPS and maintain our Accumulate rating with a target price of Rs.1,283.

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