Neutral Escorts Kubota Ltd for the Target Rs. 3,227 by Motilal Oswal Financial Services Ltd
Margins improve in a seasonally weak quarter
Loss of market share remains the key cause of concern
* Escorts Kubota’s (ESCORTS) Q4 results were ahead of our estimates, with better-than-expected margins in the tractor segment. Both MM and tractors reported a healthy margin revival QoQ in a seasonally weak quarter.
* While the demand outlook for tractors is improving, ESCORTS continues to lose market share due to an unfavorable regional mix—a trend that is likely to persist even in FY26. Further, the outlook for the construction equipment segment remains weak, following sharp price hikes undertaken to comply with new emission norms. Given these concerns, the stock at 31.6x/27.7x FY26E/27E EPS appears fairly valued. We maintain a Neutral rating on the stock with a TP of INR3,227, based on ~28x FY27E EPS.
Q4 performance ahead of estimates
* Q4 revenue grew 6% YoY to INR24.3b (ahead of our estimate of INR23b). Revenue growth was largely driven by a 7% YoY growth in tractor volumes.
* While agri revenue grew 11% YoY, Construction Equipment (CE) revenue declined 10% YoY. Non-tractor revenue contributed 19% to agri revenues in Q4 vs 18% YoY.
* EBIT margin for the agri business remained stable YoY at 11.4%. However, one has to note that agri margins were up 100bp QoQ in a seasonally weak quarter, and was the key reason for margin surprise. Both MM and Escorts have shown healthy margins in Q4 in tractor business.
* On account of weak volumes, CE’s EBIT margins declined 190bp YoY to 9.1% (ahead of our estimate of 8%).
* Overall, EBITDA margin came in ahead of our estimate at 12.1% (estimate of 10.6%).
* PBT, excluding exceptional items, grew 10% YoY.
* For FY25, revenue grew 5% YoY to INR102b.
* Agri revenue grew 7% YoY, while CE revenue declined 5% YoY.
* EBITDA Margins remained stable YoY at 11.6%.
* For FY25, agri EBIT margins contracted 50bp YoY to 10.7%. CE segment EBIT margin contracted 75bp YoY to 9.9%.
* Adjusted PBT grew 8% YoY to INR13.7b.
* The Tractor segment’s capacity utilization for FY25 stood at 70% (60% for Q4), and the same for the CE segment stood at 60% (30% for Q4).
* The Board has declared a total dividend of INR28 per share for FY25.
Highlights from the management commentary
* Management has indicated that the tractor growth outlook remains positive, with the industry expected to post mid-to-high single-digit growth in FY26 and cross 1m units for the first time.
* On a regional basis, Southern markets are likely to continue to outperform in FY26. On the other hand, North and Central markets, which grew 2.5-3% in FY25, are expected to grow at a similar pace in FY26. This regional skew remains unfavorable for ESCORTS.
* Management has given a growth guidance of 20-25% in tractor exports for FY26.
* For the tractor segment, management expects to maintain margins at FY25 levels in FY26. It does not see any signs of input cost inflation at the moment.
* Given the sharp price increase seen in the Construction Equipment segment, industry demand is likely to remain muted for FY26. Management expects margins to sustain at current levels for this segment.
Valuation and view
* The demand for domestic tractors is improving, with FY26 volumes expected to grow 6-7%, driven by a healthy monsoon, favorable crop prices, and government support. However, the key concern remains that ESCORTS has lost market share to competition in FY25, partly due to an unfavorable regional mix. However, this regional skew is likely to continue even in FY26E, making it challenging for ESCORTS to regain its lost share, at least in the near term. The Construction Equipment industry outlook also remains weak.
* As such, we have lowered our FY26E/27E EPS estimates by 3%/7%. While synergies between ESCORTS and Kubota are significant, they will likely materialize over the medium to long term. Given the above concerns, the stock at 31.6x/27.7x FY26E/27E EPS appears fairly valued. We reiterate a Neutral rating on the stock with a TP of INR3,227, based on ~28x FY27E EPS.
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