Escorts - Below expected results, slowdown to impact performance - BRICS

Escorts' revenue for Q4FY12 at Rs8.2bn was 5% lower than our estimate and PAT at Rs189mn, up 132% yoy, came in 23% below our estimate. In spite of a decline of 15% yoy in tractor volume, blended realization improved by 25% yoy, due to the merger effect. Margin improved by 62bps yoy to 5.7%. Based on a downward revision to our tractor sales and EPS estimates, our new DCF-based target price for Escorts is now marginally lower at Rs59 (vs. Rs60 earlier). We maintain our Reduce rating on the stock and expect it to attract lower multiples due to the weak outlook for the tractor industry and the merger of group/subsidiaries yet to become earnings accretive.

Revenue and realisation increase yoy: The agri-machinery segment recorded volume of 12,950 tractors and contributed 76% to total revenue. Tractor realisation at Rs4,85,923 was up 7% yoy, but down 1% qoq. Revenue at Rs8.2bn was up 7% yoy, but down 5% qoq. Auto ancillary revenue stood at Rs304mn (up 2% yoy), while revenue from railways declined 29% yoy to Rs388mn. Escorts made efforts to improve its product-mix in favour of high-value/high-margin products—50HP, 60HP, and 65HP tractors—by introducing new product launches and upgrades.

Margin improves despite yoy increase in employee cost and raw material costs: In spite of a yoy increase in raw material costs and employee costs (up 67bps and 102bps respectively), EBITDA improved by 20% yoy to Rs466mn (20% below estimate), due to a decline of 406bps yoy in other expenses. This resulted in EBITDA margin at 5.7%, up 64bps yoy, but down 82bps qoq, coming in below our estimate of 6.5%.

PAT up 132% yoy: Finance cost rose 131bps yoy due to additional working capital requirement and higher interest cost. The company made a tax provision of Rs18mn in Q4FY12, or at a rate of 8.7% (sharply lower than the rate of 30% accounted for in Q3FY12). An exceptional item of Rs5mn provided support to PAT, which came in at Rs189mn (vs. our estimate of Rs245mn), up 132% yoy and 30% qoq.

Pressures on tractor industry to increase

The launch of executive tractors, widening of its sales & distribution network, and robust brand building benefited Escorts in Q4FY12. However, we expect an increase in pressure on the tractor industry due to high cost of ownership (increase in cost of tractor prices and interest rates), sale of few food commodities below the MSP, and weak buyer sentiments. Also, we expect an increase in discounts to impact realisation.

We expect Escorts to report a decline of 9% in tractor sales for FY13 to 54,417 units (revised downwards by 4%) and a decline of 5% for FY14 to 57,385 units.

We believe the stock will attract lower multiples mainly due to the weak outlook for the tractor industry, as well as the merger of group/subsidiaries, which will not become earnings accretive for some more time. Our new DCF-based target price for Escorts now stands at Rs59 (vs. Rs60 earlier); maintain Reduce rating.

Source : Equity Bulls

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