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Growth outlook improving

View – Recent stock correction yet not make risk reward favorable

Escorts Kubota (ESCORTS) 2QFY25 results were weak led by first quarter of amalgamation of EKI and KAM. While CE/railways business performance was in-line, lower than expected margins in FES led EBITDA margins at 10.8% (flat YoY/ -240bp QoQ). Margins expansion for the merged entity to likely be gradual given full benefits of localization etc. to only kick-in over 2-3 years. However, improved volume outlook on tractors, price hikes undertaken, and benign RM should help margins expansion QoQ. We believe, ESCORTS can surpass co guidance of mid-single digit industry volume growth for FY25E with sings of volume recovery in South/West markets (key markets for Kubota) to be supported by new launches in Escorts brand. While we remain constructive on growth opportunities for merged entity in tractor, implements, components sourcing and exports to synergize only over mid-term, near term margin recovery to be gradual. Co has indicated revision in MTPB targets, impacted by few factors such as delay in land acquisition for greenfield capacity, weak exports etc. We see EKL’s market share remain range bound.

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. necessitating tight balance between market share and margins. Despite recent correction, the valuations at 34.5x/29.5x FY26/27 EPS, do reflect positive synergies making risk reward yet not favorable. We believe, benefits arising out of Kubota JV to start reflecting meaningfully led by exports ramp-up (FY26) and localization (FY27). We cut FY26/27 EPS by ~13.8/10.6% each to factor in for weaker margin profile of merged entity. Maintain Neutral with revised TP of Rs3,693 (vs Rs3,918). We value co at 35x Mar’27 EPS (vs Mar’26) and build in revenue/EBITDA/PAT CAGR of 16.2%/14.8%/13% over FY24-27E.

Result Highlights – Merged entity margins lower then expected

* Revenues grew 0.5% YoY (-11.6% QoQ) at Rs24.7b as Agri/railways/construction equip (CE) revenues grew +5.3%/-9.9%/-13.7% YoY. FES ASP grew 5.6% YoY (+0.7% QoQ) at Rs720k/unit and vol. fell ~1% YoY (14.4% QoQ) at ~26k units.

* Gross margins came in at 30.8% (+70bp YoY/+90bp QoQ). However, this was offset by higher other expense at Rs2.9b (+4.6% QoQ) led EBITDA at Rs2.8b (flat YoY/-27.3% QoQ) with margins at 10.8% (flat YoY/ -240bp QoQ).

* Segmental EBIT margins – FES at 9.1% (-20bp YoY/-250bp QoQ), Railway at 15.2% (-320bp YoY/-520bp QoQ), CE at 9.3% (-60bp YoY/-100bp QoQ).

* Weak EBITDA margins offset by utilization of tax credits available with amalgamating cos led Adj.PAT to grow 53.2% YoY (+7.6% QoQ) at ~Rs3.3b

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