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Industry guidance revised upwards Confident of outperforming industry led by new launches

* Escorts Kubota’s (EKL) 1QFY27 PAT at INR3.9b beat our estimate of INR3.3b due to higher than expected other income, while EBITDA margin at 11.2% was in line with our estimate. While tractor margins surprised positively, Construction Equipment margins disappointed.

* Management has raised its tractor volume growth guidance to midsingle digits (from marginal growth earlier) for FY27E and expects to continue to outperform industry growth on the back of new launches. However, exports are likely to remain muted in FY27. Further, margin is likely to remain under pressure at least in 2Q and then gradually normalize as input costs cool off in 2H. We estimate EKL to post a CAGR of 8%/4%/8% in revenue/EBITDA/PAT over FY26-28E. While synergies between Escorts and Kubota are significant, they will likely materialize over the medium to long term. The stock appears fairly valued at ~25.1x/22.5x FY27E/28E EPS. We reiterate our Neutral rating on the stock with a TP of INR3,348, based on ~24x FY28E EPS

PAT beat due to higher other income

* 1Q standalone revenue came in line with our estimate at INR31.8b (est. ~INR31b), up 28% YoY (+7.7% QoQ). Tractor volumes and realizations drove growth, with volumes rising 20.5% YoY to ~36.9k units and net realizations improving 5.2% YoY to INR751k per unit.

* Gross margins declined ~370bp YoY to 27.2% (-380bp QoQ), primarily due to RM cost inflation.

* As a result, EBITDA margins fell ~190bp YoY to 11.2%, though they were in line with expectations. EBITDA was up 9.4% YoY to ~INR3.6b.

* Tractor margins fell 180bp YoY to 10.8% (above est. of 10.3%). Construction equipment margin fell 40bp YoY to 5.4% (below est. of 7.5%).

* Other income at INR2.1b was higher than our estimates.

* As a result, PAT beat our estimates, up 22.8% YoY to INR3.9b.

Valuation and view

Management has raised its tractor volume growth guidance to mid-single digits (from marginal growth earlier) for FY27E and expects to continue to outperform industry growth on the back of new launches. However, exports are likely to remain muted in FY27. Further, margin is likely to remain under pressure at least in 2Q and then gradually normalize as input costs cool off in 2H. We estimate EKL to post a CAGR of 8%/4%/8% in revenue/EBITDA/PAT over FY26-28E. While synergies between Escorts and Kubota are significant, they will likely materialize over the medium to long term. The stock appears fairly valued at ~25.1x/22.5x FY27E/28E EPS. We reiterate our Neutral rating on the stock with a TP of INR3,348, based on ~24x FY28E EPS.

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