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Valuation & View – Margins to sustain; MTBP revision key to watch for

Escorts Kubota (ESCORTS) 1QFY25 results were steady with no major surprises across parameters. While tractor business performance was in-line, higher than expected margins in Railways and Construction equipment (CE) led ~5% EBTDA beat to our estimates. EBITDA margins at 14.3% (+30bp YoY/ +150bp QoQ, est 13.7%) likely sustain given improved volume outlook on tractors, price hikes undertaken to negate recent RM inflation. The co guidance of mid-single digit volume growth for the domestic industry hinges primarily on normal monsoons and festive as demand sentiments are mixed currently among key regions. However, we remain constructive on growth opportunities for merged entity in tractor, implements, components sourcing and exports over mid-term. Even though the 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 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. The valuations at 38.2x/33.9x FY25/26 EPS, do reflect positive synergies from merged entity. We believe, benefits arising out of Kubota JV to start reflecting meaningfully from FY26E led by exports ramp-up and localization. Our raise FY25/26 EPS by ~2% each to factor in for better CE and railways performance. We maintain Neutral with revised TP of Rs3,918 (vs Rs3,850). We value co at 32x Mar-26 EPS and build in revenue/EBITDA/PAT CAGR of 15.2%/22.5%/19.6% over FY24-26E.

Result Highlights – CE, railways aid performance; tractor in-line

* Revenues declined 1.5% YoY (+10.1% QoQ) at Rs22.9b (est ~Rs22.8b) as Agri/Railways/CE revenues were at +0.5%/-17.8%/+2.7% YoY. Agri ASP grew ~4% YoY (-0.4% QoQ) at Rs651.6k/unit (est Rs660.9k/unit).

* Gross margins came in lower at 31.9% (+170bp YoY/flat QoQ, est 32.2%). 1QFY25 did not see RM inflation impact while expect the same in 2QFY25 led by NR increase, castings. Price hike of 0.5-0.6% to partially cover the same.

* However, this was offset by lower other expense at Rs2.4b (+1.3% QoQ, est Rs2.6b) led to EBITDA being better at Rs3.27b (flat YoY/+23% QoQ, est Rs3.12b) with margins at 14.3% (+30bp YoY/+150bp QoQ, est 13.7%).

* Segmental EBIT margins – Agri at 13.2% (-20 YoY/+200bp QoQ), Railway at 20.5% (-40bp YoY/+360bp QoQ), CE at 10.4% (+280bp YoY/-30bp QoQ).

* Adj.PAT grew 2.4% YoY (+19.6% QoQ) at ~Rs2.9b (est Es2.7b, cons ~Rs2.8b).

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