Neutral Escorts Kubota Ltd For Target Rs.3,295 by Motilal Oswal Financial Services Ltd
Operating performance disappoints
Demand outlook positive, though recovery in market share crucial
* Escorts Kubota (ESCORTS) reported a weak operating performance in 3QFY25 as EBITDA margin declined to 11.4% (est. 12%) due to an unfavorable mix and low ASP. While management remains optimistic about near-term demand and has completed channel inventory rationalization, regaining lost market share will be critical.
* The company has discontinued the railway division following its recent slump sale to Sona Comstar, and it is no longer part of our estimates. Along with lower gross margins, this leads us to cut our FY25E/FY26E consolidated EPS by ~15%/10%. We maintain a Neutral rating on the stock with a TP of INR3,295, based on ~28x Dec’26E EPS.
Operational performance disappoints, yet again
* 3QFY25 standalone revenue/EBITDA/PAT grew ~9%/4%/8% YoY to INR29.4b/INR3.4b/INR2.9b. 9MFY25 revenue/EBITDA/adj. PAT declined 4%/5%/19% YoY. The company has discontinued its railway division from this quarter.
* Revenue from agri machinery grew ~9% YoY. Revenue from the construction equipment (CE) division rose 4% YoY.
* Gross margin during the quarter declined 60bp YoY/350bp QoQ to 26.9% (est. 30.7%), which was offset by lower other operating expenses. As a result, EBITDA margin stood at 11.4% (-60bp YoY/+110bp QoQ, est. 12%).
* Agri machinery EBIT margin declined to 10.4% (vs. 12.1% in 3QFY24) due to an unfavorable mix (higher non-core regions and 40-50 HP segment) and lower realization per unit. The 160bp YoY margin impact in agri machinery was due to production swings (2Q to 3Q), commodity cost inflation (~50bp impact), and higher festive discounting in Sep-Nov’24, which will not persist.
* CE margins improved to 11% in 3QFY25 (vs. 8.1% in 3QFY24) due to price hikes and better operational efficiency.
* Non-tractor revenue formed 21% of agri machinery revenue, up from 19% YoY. The harvester segment grew over 30% YoY, but it is currently imported, impacting margins.
* The board announced an interim dividend of INR10 per share.
Highlights from the management commentary
* Tractor Industry is expected to grow by 14-15% in 4QFY25, with 1QFY26 also expected to see healthy growth given positive rural sentiment. The FY26 outlook depends on the monsoon, which remains a key demand drive
* EKL wholesale market share stood at 11.8% for 3Q. Retail market share remains higher than wholesale market share due to inventory rationalization, now at four weeks (from six weeks earlier). EKL’s market share was impacted by higher industry growth in non-core markets (South, West, Chhattisgarh, Odisha, Jharkhand). Market share is expected to improve over the next 3-6 months, supported by product interventions and channel expansion.
* EKL launched the PROMAXX series under the Farmtrac brand (30-50 HP) to strengthen its presence in Gujarat, Maharashtra, Chhattisgarh, Odisha, and MP, with more product launches lined up.
* Export volumes declined to 971 units (vs. 1,371 YoY), with ~27% of sales to the Kubota Global Network. Exports are expected to grow 20-25% in FY26, aided by a low base and increased access to Kubota’s European network (~5,000 units currently).
Valuation and view
* Demand for domestic tractors is improving, with FY25 volumes expected to grow by 6-7%, driven by a healthy monsoon, favorable crop prices, and government support. While management remains optimistic about near-term demand and has completed channel inventory rationalization, regaining lost market share will be critical.
* The company has discontinued the railway division following its recent slump sale to Sona Comstar, and it is no longer part of our estimates. Along with lower gross margins, this leads us to cut FY25E/FY26E consolidated EPS by ~15%/10%. While synergies between Escorts and Kubota are significant, they will likely materialize over the medium to long term. The stock is trading at a premium of ~32x FY25E/27x FY26E EPS, compared to its 10-year average of ~18x, mainly due to the Kubota parentage. We maintain a Neutral rating on the stock with a TP of INR3,295, based on ~28x Dec’26E EPS.
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