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Structural Levers in Place; Near-Term Upside Capped

Est. Vs. Actual for Q1FY26: Revenue – Largely INLINE ; EBITDA – BEAT ; PAT – BEAT

Change in Estimates post Q1FY26

FY26E/FY27E: Revenue: -6.9%/-8.1%; EBITDA: -6.4%/-9.2%; PAT: -8.8%/-7.8%.

Recommendation Rationale

• Domestic Tractor Business: Q1FY26 domestic tractor industry volumes grew 9.2% YoY to 2.86 Lc units, led by a 19.3% rise in the south and west; EKL’s stronghold markets in the north and central grew a modest 0.5%. EKL’s domestic tractor volumes declined 1.9% YoY to 28,848 units, impacted by geographic mismatch and inventory normalisation. Market share declined to ~8.7% (vs ~9.4% YoY); management attributes this to an industry swing and expects partial normalisation from Q3FY26.

• Export Segment - Excellent Growth; Limited Immediate Impact: Export volumes grew 80.3% YoY to 1,733 tractors, aided by traction in Europe, South Africa, and Mexico. ~52% of exports are now routed through Kubota’s global distribution network, with a monthly run-rate stabilising at 500–600 tractors. Management targets ~25–30% growth YoY, with a mediumterm export revenue share goal of ~15%. Export contribution remains small on the base and insufficient to offset domestic pressures in the near term.

• Construction Equipment: Margin Drag to Persist in the Near Term: In Q1FY26, CE volumes declined to 1,055 units (vs 1,382 YoY), impacted by industry de-growth (-14%) and transition to new emission norms. EBIT margin declined sharply to 5.8% (vs 10.3% YoY) due to the clearance of old-emission inventory and low production levels hurting fixed-cost absorption. Management expects margin normalisation (10–11%) only in H2FY26, with monsoon season and project delays weighing on H1 volumes.

Sector Outlook:

Cautiously Positive

Company Outlook & Guidance: As per management, Escorts Kubota is structurally transforming through strategic product introductions, export-led diversification, Kubota synergy benefits, and reinvestment of capital from RED divestment. These levers are expected to materialise only gradually over the next 4–6 quarters.

Current Valuation: 26x FY28 EPS (earlier 28x FY27 Eps).

Current TP: Rs 3,135/share (Earlier TP: Rs 3,365/share)

Recommendation: We continue to maintain our HOLD rating on the stock.

Financial Performance: Escorts Kubota Ltd. (Escorts) reported revenue of Rs 2,500 Cr in Q1FY26, down 3% YoY but up 2% QoQ, largely in line with expectations. EBITDA stood at Rs 321 Cr, marking an 8% beat; up 161%/12% YoY/QoQ, and EBITDA margin came in at 12.9%, up 808 bps YoY and ~110 bps QoQ, supported by lower personnel costs and cost optimisation efforts. Adjusted PAT stood at ~Rs 293 Cr, reflecting a 7% beat, broadly tracking the EBITDA performance and higher other income.

Outlook

Escorts Kubota Ltd. (EKL) reported a steady operational performance in Q1FY26 amidst challenging domestic market dynamics and the ongoing transition in its construction equipment (CE) business. While export traction and product refreshes are promising, domestic market share pressures, delayed land acquisition, and cyclical headwinds in the CE segment constrain near-term upside.

Valuation & Recommendation

In the backdrop of the company’s positive long-term fundamentals – strong cash flow generating capabilities and greenfield expansion projects – we value the stock at 26x FY28 EPS (earlier 28x FY27 EPS). However, synergy benefits with Kubota in agribusiness are expected to take longer than estimated earlier due to a slowdown in international markets, particularly in the USA. Additionally, discontinuing profits from RED in FY25/26 onwards (we revise our FY25/26E earnings downward), the valuation appears full. Hence, we maintain our HOLD rating on the stock with a TP of Rs 3,135 (earlier Rs 3,365), implying a downside of ~8% from the CMP.

Key Concall Highlights

Product Pipeline: Directionally Positive, Full Impact in FY27

Escorts Kubota's upcoming product portfolio indicates a structured and brand-specific approach to drive long-term growth. Key introductions include:

• Promax/Powertrac: Initial traction in select states is encouraging, contributing to marginal market share gains.

• Wetland Series (Powertrac): Launch targeted for Sep–Oct’ 25, with material contribution anticipated in Q4FY26 and FY27 (Southern and Easter markets where paddy cultivation is prominent.

While the strategic expansion across Powertrac, Farmtrac, and Kubota is well-calibrated, synergies remain limited in the near term as integration is still at the pilot stage. The company has 1,600 dealers across India with 1,250 branches for Kubota, Farmtrac, Powertrac and Escort brands.

Balance Sheet & Other Income

Other income recorded a notable uptick, driven by:

• Deployment of surplus capital from the RED divestment;

• MTM gains in a declining interest rate environment;

• Continued healthy cash flow generation.

This positions EKL with sufficient liquidity to reinvest in core business areas and R&D, though visibility on capital deployment timelines remains limited.

UP Land Acquisition – Timeline Slippage

Land acquisition for the greenfield project in Uttar Pradesh faces delays due to pending handovers from farmers. Management expects this to conclude by the end of FY26, post which capex-related execution may commence. No significant deployment is expected in the interim.

Margin Outlook & Commodity Cost Pressure

Q1 margins were supported by subdued steel prices. However, the management has indicated a potential uptick in steel and metal costs in Q2, likely weighing on tractor margins. Despite this, EBIT margin guidance for the agri segment is maintained at 12–12.5% for FY26.

Key Risks to Our Estimates and TP

• A lower demand scenario may hamper vehicle off-take, impacting our sales volume growth forecasts.

• Adverse macroeconomic situations continue in countries like the EU and the US, delaying the pick-up in exports.

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