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In-line; Valuations fully reflect merger synergies

Valuation and View – Growth challenges in tractors led by high base

Escorts Kubota (ESCORTS) 4QFY24 results were steady with no major surprises across parameters. Better ASP, operating leverage and cost passthrough led construction equipment (CE) EBIT margins highest at 10.7% (+260bp YoY/ +240bp QoQ). However, the contraction in agri segment EBIT margins to 11.2% (+120bp YoY/ -270bp QoQ) is sharper than expected. The sustenance of margins to be influenced by weak operating leverage as tractor volumes are expected to be muted in 1HFY25E. The co guidance of low to mid-single digit volume growth for the domestic industry hinges primarily on normal monsoons as demand sentiments are weak. However, we remain constructive on growth opportunities for merged entity in tractor, implements, components sourcing and exports over mid-term. We believe, EKL is more vulnerable v/s peers as 1) it derives ~70% of its revenues from agri segment and 2) aggressive expansion by Sonalika, TAFE, John Deere, etc. to necessitating tight balance between market share and margins. The valuations at 32.6x/28.8x FY25/26 EPS, do reflect positive synergies from merged entity. We believe, benefits arising out of Kubota JV to start reflecting meaningfully from 2HFY25E led by exports ramp-up and localization. Our FY25/26 EPS are largely unchanged as we maintain Neutral with revised TP of Rs3,232 (earlier Rs2,827). We value co at 27x Mar-26 EPS and build in revenue/EBITDA/PAT CAGR of 15.2%/21.3%/18.3% over FY24-26E.

Result Highlights – Contraction in agri EBIT sharper than expected

* Revenues declined 4.6% YoY (-10.3% QoQ) at Rs20.8b (est Rs20.7b, cons Rs20.7b) as Agri/Railways/CE revenues declined -10.7%/-10.1%/ +23.8% YoY. Agri ASP grew ~4% YoY (+2.6% QoQ) at Rs654.3k/unit (est Rs642.3k/unit).

* Gross margins came in better at 31.9% (+340bp YoY/+130bp QoQ, est 30.6%). However, this was offset by higher other exp at Rs2.4b (+2.5% QoQ, est ~Rs2.1b) led to EBITDA in-line at Rs2.65b (+12.8% YoY/-15% QoQ) with margins at 12.8% (+200bp YoY/ -70bp QoQ, in-line).

* Segmental EBITM – Agri at 11.2% (+120 YoY/ -260bp QoQ), Railway at 16.9% (+290bp YoY/ -150bp QoQ), CE highest at 10.7% (+260bp YoY/ +240bp QoQ).

* Adj.PAT grew 18.8% YoY (+12.7% QoQ) at Rs2.42b (in-line).

* FY24 performance - Revenue/EBITDA/Adj.PAT grew 5%/50%/55%.

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