Buy Escorts Kubota Ltd for the Target Rs.825 by Motilal Oswal Financial Services Ltd
Tractor margins improve
Market share loss in tractors remains the key concern
* Escorts Kubota’s (ESCORTS) 1QFY26 PAT of INR3.1b was in line with our estimate. Tractor segment margins exceeded our estimates, whereas construction equipment (CE) margins came in below estimates.
* While the tractor industry outlook is positive, continued market share loss for ESCORTS has been the key concern. Further, the CE business is likely to take time to normalize given the recent sharp price hikes after the shift to new emission norms. Though there are notable synergies between Escorts and Kubota, they will likely materialize over the medium to long term. Given this, the stock at ~32x/29x FY26E/27E EPS appears fairly valued. We maintain a Neutral rating with a TP of INR3,380, based on ~28x Jun’27E EPS.
1Q earnings in line with estimates
* 1QFY26 standalone revenue came in below our estimate at INR24.8b (est. INR26.1b), down ~3% YoY (growing 2.2% QoQ), primarily due to lower-than-expected blended ASP in tractors.
* On the other hand, EBITDA margin improved 70bp YoY to 13.1%, ahead of our estimate of 12.3%.
* Despite this, EBITDA remained broadly in line with our estimate at INR3.3b (~3% YoY) given the lower revenue.
* PAT grew 18.5% YoY to INR3.1b, in line with our estimate.
* Among segments, agri machinery revenue inched up 0.4% YoY, while CE division revenue fell severely by 20.8% YoY due to weak demand.
* Agri machinery EBIT margin improved to 12.6% (vs. 11.7% in 1QFY25) likely due to the healthy pricing discipline in the industry.
* However, CE margins dropped to 5.8% (vs. 10.3% in 1QFY25) due to weak demand.
* An exceptional gain of INR759m was reported due to the sale of certain land and buildings to Sona Comstar.
Highlights from the management commentary
* Domestic tractor: Domestic tractor industry volumes grew 9% YoY to 286k units in 1Q, with North and Central regions marginally up 0.5% and the rest of India substantially up 19.3%. However, domestic volumes for Escorts declined 2% YoY to 28,848 units with a market share of 10.5%. Dealer inventory currently stands at ~ five weeks.
* Exports grew strongly by 80% YoY to 1.7k units over a low base. Exports contribute ~6% of ESCORTS’ total volumes. Tractor export growth guidance stands at 25-30% for FY26, led by new product launches and Kubota network access. Exports through Kubota’s global network contributed ~52% of total export volumes.
* Domestic tractor outlook: 2HFY25 saw 15% YoY growth in tractors. Given this high base, management expects the industry to remain flat or post marginal growth in 2HFY26. Hence, management expects the tractor industry to post 4- 5% YoY growth in FY26. Also, the outperformance of ESCORTS’ weak markets, South and West, is likely to cease in 2H as it will be in the base. Hence, ESCORTS expects to marginally outperform the industry or grow in line in 2H. Overall, the company expects to post some growth in tractor volumes in FY26.
* Greenfield plant: ESCORTS is pursuing a greenfield expansion plan and is evaluating land acquisition in Uttar Pradesh, following the cancellation of its Rajasthan facility plans. There have been delays in acquiring the land from farmers by the UP government; however, this should be resolved in the next month or so. Management expects to close the acquisition by FY26 end after conducting the required due diligence.
Valuation and view
* While the tractor industry outlook is positive, continued market share loss for ESCORTS has been the key concern. Further, CE business is likely to take time to normalize given the recent sharp price hikes after the shift to new emission norms. Though there are significant synergies between Escorts and Kubota, they will likely materialize over the medium to long term. Given this, the stock at ~32x/29x FY26E/27E EPS appears fairly valued. We maintain a Neutral rating on the stock with a TP of INR3,380, based on ~28x Jun’27E EPS.
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