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Market share gains efforts not yielding results

Valuation and View

Escorts (ESC) 4QFY22 results were in line across all fronts, wherein gross margins came in at ~29.6% (‐20bp QoQ). This was the lowest in last 7 years largely led by lag in RM pass through. Post the cut in growth guidance for 3 times, the management remain hopeful for tractor industry growth in FY23 with ~15‐20% growth expected in 1QFY23. We believe while demand sentiments have been impacted by product price hikes (~11‐15% over 6 quarters), monsoon spread outremain 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 recent valuation contraction at ~18x/17x FY23/24 EPS (v/s ~22/20.5x earlier) do partially reflect 1) consistent market share loss (despite network expansion and new launches) and 2) weakening growth visibility. We believe, benefits arising out of Kubota JV to start reflecting meaningfully only over 2‐3 years, hence our estimates do not factor in any contribution from the Kubota JV yet. We would keenly await managements action plan post Kubota which ESC intend to release by 3QFY23. We cut FY23 EPS by ~7% to factor in weaker sales mix and RM headwinds while maintain FY24 EPS. However, we upgrade the stock to Reduce (from Sell) with TP of Rs1,464 (earlier Rs1,473), valuing the stock at 16x FY24 EPS. We build ~6% CAGR FES volume decline over FY22‐24E.

Result Highlights – Gross margins at 7 years low led by RM headwinds

* S/A revenues declined ~16% YoY (‐5% QoQ) at Rs18.6b. Tractor revenues declined ~22% YoY at Rs13.6b as ~33% decline in volumes was partially offset by ~17% increase in ASPs at Rs622.5k/unit. Revenues from railways/construction equipment (CE) grew 18%/‐1% YoY.

* Led by RM inflation and lag in RM passthrough due to weak demand, gross margins contracted for 2nd consecutive quarter by 20bp at 29.6% (at 7 years low).  

* Consequently, EBITDA declined ~29% YoY (‐8% QoQ) at Rs2.4b (in‐line) with margins at 13.1% (‐250 YoY/ ‐40bp QoQ). FES/Railways/CE margins fell QoQ by 30bp/120bp/110bp at 15.5%/13.1%/3.6%.  

* 4QFY22 Adj. PAT declined 25.5% YoY (flat QoQ) at Rs2b (in‐line). FY22 revenue grew 3% to Rs71.8b while EBITDA and PAT declined ~16% each to Rs9.5b and Rs7.3b respectively. 

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