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Dual impact of market share and margins loss

Valuation and View

Escorts Kubota (Escorts) 1QFY23 results were weak with EBITDA/ Adj. PAT miss by ~30/37.5% to ours and ~29/34% to street estimates. 1QFY23 witnessed dual impact of 1) market share loss by ~210bp QoQ/~140bp YoY and 2) margins contraction of ~350bp QoQ/420bp YoY to 10% (10 qtr low). Sharp decline in margins explained by 7?year low gross margins at 27.8% (est 30%, ?210bp QoQ), despite price hikes of ~2? 2.5%/~2% in 4QFY22/1QFY23 with product mix largely intact QoQ (HP wise). Industry growth guidance for FY23 has been revised from mid?high single digit in 4QFY22, to low?mid single digit. We believe while demand sentiments have been impacted by product price hikes (13?16% over 7 quarters), monsoon spread out remain key for meaningful volume recovery

We believe, Escorts is more vulnerable v/s peers as i) it derives >80% of its revenues from FES segment and ii) aggressive expansion plans by Sonalika, TAFE, John Deere, etc. to continue dent market share. The valuations at 24.3x/18.7x FY23/24 do not reflect, 1) consistent market share loss (despite network expansion and new launches) and 2) weakening margins and growth profile. We believe, benefits arising out of Kubota JV to start reflecting meaningfully only over 2?3 years. We would keenly await managements action plan post Kubota which ESC intend to release by 3QFY23. We cut FY23 EPS by ~16% to factor in weaker sales mix and aggressive pricing (to partially gain lost MS) while maintain FY24 EPS. We maintain Reduce on the stock with TP of Rs1,382 (earlier Rs1,372) valuing at 15x FY24 EPS. We build ~4% CAGR FES volume decline over FY22?24E.

Result Highlights – Weak results v/s ours and street estimates

* S/A revenues grew ~8% QoQ/20% YoY at Rs20.1b (in line with our est). Tractor revenue grew 17% QoQ/13% YoY at Rs15.9b led by 22% QoQ/3% YoY growth in volumes, coupled with ASP de?growth of 4% QoQ/ +9% YoY at Rs5.95L.  

* Led by RM inflation, gross margins contracted 210bp QoQ at 27.8% (est at 30%). This coupled with inflationary cost pressure led EBITDA decline of ~20% QoQ/16% YoY at Rs2b (est at Rs2.9b). Consequently, margins too came lower at 10% (?350bp QoQ, est at 14.4%).

* Segmental PBIT Margins? Agri margins came in at 10.6% (v/s 15.5% in 4QFY22), CE margins at 1% (v/s 3.6% in 4QFY22) and RE at 13.6% (v/s 13.1% in 4QFY22).

* Weak op performance coupled with lower other income at Rs354m (est at Rs600m) and higher tax at 25.6% (et at 24%) led Adj. PAT miss at Rs1.5b (?27% QoQ/?20% YoY, est at Rs2.4b). 

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