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Escorts’ Q2 margin performance was below estimates (down by 118bps QoQ to 12.9%; Emkay: 13.5%), largely owing to operating de-leverage in Tractors. While near-term tractor industry prospects appear benign (given the high base), we remain positive on the medium-to-long term growth prospects, driven by planned product/network expansion and strong opportunity for vehicle exports (by leveraging co-parent Kubota’s global network) as well as component exports (as part of Kubota’s global supply-chain diversification). Our forward EPS estimates are unchanged (~22%/~37% revenue/EPS CAGR over FY23-26E driven partly by integration of Kubota entities from FY24E) and retain BUY with a revised TP of Rs3,430/share (vs. Rs3,020 earlier; rolled-over valuation to FY26E with unchanged 25x core PER + Rs220 cash/share.).

Escorts: Financial Snapshot (Standalone)

Operating de-leverage affects sequential margins in Q2

Revenue grew 8.6% YoY to Rs20.5bn, with EBITDA margin up by 476bps YoY (-118bps QoQ) to 12.9% (Emkay: 13.5%). Margin fell QoQ due to operating de-leverage, though gross margin was higher by ~210bps. Agri-related revenue declined 4% YoY to Rs13.9bn (ASPs up 3%); Agri margin dipped by ~100bps QoQ to 12.5%, on lower volumes. Construction equipment (CE) revenue grew 72% YoY to Rs4.1bn (volume-led); CE margin grew by 260bps QoQ to 10.2%. Railways revenue rose 29% YoY to Rs2.3bn, with margin down by 240bps QoQ to 18.5% (order book at Rs8.7bn vs. Rs9.5bn in Jun-23). Overall PAT grew 65% YoY to Rs2.35bn (above estimate), aided by higher ‘other income’

Earnings call KTAs

1) Expects FY24E tractor industry growth of -2% to +2% (vs. a low mid-single-digit guidance in Q1); Q3 to be positive owing to the festive season; Q4 to also be positive on a slightly-lower base, pre-election festive spends and pre-April festive inventory buildup. 2) Tractor industry festive growth was marginally higher YoY in retail terms during Navratras, and is seen strengthening during Diwali; Company’s inventory to normalize to ~4 weeks by end-Nov vs. ~5-5.5 weeks at start of the festive season. 3) Tractor industry exports are down ~26% YoY, YTD (amid recessionary headwinds in markets like Europe), and could end the year lower by 10-15%; Escorts’ exports could rebound by ~20% in FY25 and accelerate thereafter. 4) Expects growth in the CE segment to endure, driven by GoI thrust on infra; confident of double-digit growth in Railways in coming years. 5) Talks are ongoing with regulators, for possible deferment of TREM-5/BS-5 emission norms (presently slated for Apr-24); could possibly imply ~Rs125K/unit cost impact in sub-50hp tractors and 8-10% cost impact on BS-3 CE. 6) Cumulative 1.7% price hike taken in Tractors in H1; full benefit to be realized in H2; while commodities would harden a bit in Q3, Escorts does not expect it to be a major headwind. 7) Confident of sustaining H1 CE margin; Railways to sustain margin at current ~200bps. 8) Expects NCLT clearance for the Kubota entity merger in Q4. 9) FY24 capex seen at Rs2-2.25bn.

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