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Performance in line; near-term outlook remains weak

Tractor industry to witness low-to-mid-single-digit growth in FY25

* Escorts Kubota (Escorts)’s 4QFY24 result was broadly in line. Standalone EBITDA margin came in at 12.8% (down 70bp QoQ). The near-term business outlook appears weak, especially for the agri segment, due to the ongoing election, lower groundwater level, and weak Rabi output.

* We raise our EPS by ~7%/12% for FY25E/26E due to a healthy improvement in margins for the construction equipment and railway divisions coupled with component exports to Kubota, which is likely to commence from FY26. However, we believe the current valuations of ~33.9x/28.5x FY25E/26E EPS already reflect the synergy benefits arising due to the partnership with Kubota. Reiterate Neutral with a TP of INR3,145, based on ~26x Mar’26E EPS (vs. 25x earlier).

EBIT margins for agri and railway segments contract sequentially

* Escorts’s 4QFY24 standalone revenue/EBITDA/Adj. PAT was down 5%/ up 13%/up 31% YoY to INR20.8b/INR2.7b/INR2.4b (vs. est. INR21.4b/ INR2.8b/INR2.5b). Consolidated FY24 revenue/EBITDA/PAT grew ~5%/ 50%/55% YoY to INR88.5b/INR11.7b/INR10.5b.

* Revenue decline was led by weakness in the agri machinery segment, which dipped 11% YoY, and a 10% YoY drop in revenue of the railway equipment segment. Revenue from construction equipment grew ~24% YoY.

* Gross margin improved ~340bp YoY/130bp QoQ to 31.9% (est. 31%), led by mix and price hikes. EBITDA margin expanded ~200bp YoY to 12.8% (-70bp QoQ; in line).

* EBIT margins for Agri/Railway/Construction segments expanded 130bp/290bp/260bp YoY to 11.2%/16.9%/10.7%.

* Operating cash flows for the year surged 4.6x YoY, while FCF grew to INR8.6b (vs. INR0.3b in FY23).

* The Board recommended a final dividend of INR18 per share for FY24 (vs. INR7 per share in FY23).

Highlights from the management commentary

* Tractor Domestic demand outlook: Management expects low-to-midsingle-digit YoY volume growth for FY25. Demand is likely to remain weak in 1QFY25 led by lower groundwater level, weak Rabi output, and the impact of the ongoing election. However, demand is expected to recover from Aug’24, as the monsoon outlook remains positive.

* Capex of INR3b envisaged for FY25 (vs. INR1.75b in FY24) towards product development, building infrastructure, and other segments such as railways and construction equipment. Additionally, management hinted at a capex of INR4b for the greenfield project in Rajasthan; however, it is still under negotiation.

Valuation and view

* We expect a ~5% volume CAGR for tractors over FY24-26. However, the impact of ongoing elections, low reservoir levels, mainly in the western and southern parts of the country, would keep tractor volumes in check in the near term. A faster recovery in other businesses and a ramp-up in its partnership with Kubota would partially offset the cyclical impact of the tractor industry.

* The stock trades at ~33.9x/28.5x consolidated FY25E/26E EPS, representing a premium to its 10-year average of ~17.3x, driven by an improvement in operating parameters as well as the Kubota partnership. Moreover, the valuation also reflects possible opportunities arising from Kubota’s parentage (i.e., agri implements, exports, component supplies, etc.) as most of these opportunities will become relevant only beyond FY25. Reiterate Neutral with a TP of INR3,145, based on ~26x Mar’26E EPS (vs. 25x earlier).

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