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* 1QFY24 results were better across all fronts, led by multiple levers, such as better ASPs, gross margin benefits, and cost-control measures. Consequently, EBITDA margin came in at 14% (vs. est. 10.8%). The management has guided for i) low-mid single-digit tractor volume growth in FY24E and ii) sustenance of EBITDA margin for the coming quarters.

* We raise our FY24E/FY25E EPS by 21.4%/9.3% to factor in for margin expansions and high ‘other income’. Moreover, we have increased our target multiple to 22x Sep’25E EPS (vs. 20x earlier). We retain our Neutral stance on the stock with a TP of INR2,450.

Margin beat driven better ASPs, softening RM prices, and costcontrol measures

* ESCORTS’ 1QFY24 revenue/EBITDA/Adj. PAT grew ~16%/62%/92% YoY to INR23.3b/3.3b/2.8b (vs. est. INR22.3b/2.4b/2b).

* Tractor volumes declined 1% YoY, while ASP grew 5% YoY (down 1% QoQ) at INR627.1k (vs. est. INR625.8k).

* Gross margin expanded 240bp YoY/170bp QoQ to 30.2% (vs. est. 28.8%). This was driven by a steady decline in commodity prices and better product mix across business divisions.

* This, coupled with cost-control measures led EBITDA margin beat at 14% (up 4pp YoY/3.2pp QoQ) vs. est. 10.8%.

* PBIT margin for Agri/Railway/construction division expanded 2.8pp/7.3pp/6.6pp YoY and 3.5pp/6.9pp/-0.5pp QoQ to 13.4%/20.9%/7.6%.

* Better operating performance was further benefitted by higher-thanexpected ‘other income’ at INR945m (vs. INR700m).

Highlights from the management commentary

* Domestic demand- FY24 domestic tractor volumes are likely to post low-to-mid single digit growth on a YoY basis. While the rainfall has been positive so far, it will get partially offset by reducing state subsidies.

* Exports- The company expects export volumes to pick up from 2HFY24. Presently, exports are under pressure, due to a slowdown in EU and the US, especially in the compact category. Contribution of exports through the Kubota channel stood at ~32%.

* Margins to sustain in the coming quarters- RM prices have declined over the last three quarters and are currently ~2.5% lower than its peak in 2QFY23. The company implemented a price hike of ~1% in midJune. These factors, combined with operating leverage and costcontrol measures, are expected to support the sustenance of EBITDA margin over the next few quarters

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