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Escorts’ Q3 margin performance was in line (up 61bps QoQ to 13.5%), largely on the back of operating leverage in the tractor division. The company downgraded its tractor volume guidance to a 6-7% dip for FY24E (vs. earlier guidance of -2% to +2%) amid high base; however, in our view, medium-tolong term growth prospects remain robust amid planned product/network expansion and strong opportunity for vehicle exports (by leveraging co-parent Kubota’s global network; can scale up exports by 4x over the next 3-4 years) as well as component exports (as part of Kubota’s global supply-chain diversification). We trim FY24E/FY25E EPS by ~3%/~2.5% on lowered tractor guidance; FY26E EPS is unchanged. We retain our BUY rating with an unchanged TP of Rs3,350/share (25x core PER + Rs220 cash/share).

Lower railway revenues affect the top line; margins in line

Revenue grew 2.5% YoY to Rs23.2bn (below estimates); EBITDA margin rose 61bps QoQ at 13.5% (in-line); margins were supported by increased tractor volumes. The agri segment’s revenue dipped 3% YoY to Rs16.5bn; realizations increased 5% YoY/1% QoQ to Rs637K/unit and EBIT margin was higher by ~160bps QoQ at 13.2%, led by softer RM, improved realizations, and cost controls. Construction Equipment’s (CE) revenue grew 49% YoY to Rs4.5bn; EBIT margin declined 190bps QoQ to 8.3%. Railway Equipment’s (RED) revenue was lower by 18% YoY to Rs2bn; EBIT margin was stable sequentially at 18.4%; order book stands at Rs9bn vs. Rs8.7bn as of Sep-23. Overall, PAT grew 49% YoY to Rs2.7bn (above estimate) on higher-than-expected other income.

Earning call KTAs i) Management expects the tractor industry to decline by 6-7% in FY24 (vs. -2% to +2% expectations earlier; implying a 12-13% dip in Q4) due to high base, erratic and deficient rainfall in the West and South regions, and upcoming elections; maintains long-term growth expectations of a 6-8% CAGR; ii) Inventory levels are currently comfortable at 35-38 days; iii) Tractor exports have strong runway ahead; work is underway to streamline distribution between Escorts and Kubota networks; sees the possibility for current 7-8K units/year run rate to increase to 25-30K units/year over the coming 3-4 years and aims to be the second largest exports player; iv) Has already identified components for exports to global Kubota operations as part of the latter partly diversifying sourcing to India; v) Decline in railways revenue in Q3 is transient (due to reduced ordering from Indian Railways); CE outlook is also strong post-elections; vi) Escorts is targeting network expansion in the West to improve tractor positioning; vii) Implementation of TREM-V norms for sub-50hp categories has been shifted to Apr-26; vii) Operations of the captive financing arm could commence in FY25E; viii) NCLT clearance for the merger of Kubota entities can happen in 2-3 months; ix) Bulk of RM softening is behind; pricing environment is stable.

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