Escorts - SPA Securities

Escorts reported net sales of INR 8234 mn, up by 7.1% YoY & down by 18.8% QoQ. EBITDA margins expanded by 240 bps YoY to 5.65%, on the back of lower operating expenses partly offset by higher employee cost. With monsoon playing a spoilsport, offtake of tractors de-grew by 14.8% YoY. Railway equipment segment has seen a sharp improvement in margins, whereas auto ancillaries segment and construction equipment segment continued to remain under pressure. We continue to retain our "BUY" recommendation.

Weak monsoon hurts topline

Tractor segment contributed ~75% to revenues in Q4FY12. Revenues from the segment contracted by 9% YoY & 20.5% QoQ to INR 6293 mn, on the back of fall in tractor volumes by 14.8%. Realizations improved by 680 bps YoY to INR 485923/unit on the back of favorable product mix. EBIT margin expanded 153 bps YoY to 6.46% and remained flat on a sequential basis.

Railway segment - improved margins

Revenues from Railway segment stood at INR 388 mn, down by 29.8% YoY & 1.2% QoQ. EBIT margin expanded by 844 bps YoY & 1782 bps QoQ to 19.9% on account of product mix enrichment. In railway segment, the company has an order book worth INR 700 mn which is to be executed over the next couple of quarters.

Auto Ancillary - under pressure

Net sales in the auto ancillary segment stood at INR 304 mn, up by 2.1% YoY & down by 27.1% QoQ on the back of sluggish demand from the CV industry. EBIT margin at -11.4% has continued to be in the negative territory.

Construction Equipment - declined margins

Net sales from construction equipment segment contracted by 15.99% QoQ to INR 1341 mn due to the overall slowdown in the industry. EBIT margin contracted by 429 bps QoQ to -5.83%.

Expansion in EBITDA Margin

EBITDA margin expanded by 33 bps QoQ to 5.65% on the back of improved performance from railway segment partly offset by lower margins from construction equipment and auto ancillary segment. PAT margin expanded by 41 bps QoQ to 2.23% led by increased EBITDA margin.

New product launches to beat industry growth

The company has recently launched "Powertrac Diesel-Saver plus" tractor series with a 10% power upgrade across its range, catering to the emerging 'commerce-minded' segment of the Indian farmers, who use their tractors not just for regular farm work but also as a source of generating additional income. This tractor range has seen strong reception from markets like UP, MP and Bihar. The company has also launched Executive Tractors in the 60-65 HP range under Farmtrac brand. The company is aiming to capture a market share of 25% (currently 10%) in the high HP segment whose share in the overall tractor industry is expected to increase from 15% to 23% over the next 6-7 years. We expect the high HP segment to fetch 2-3% higher margin over that of mid and small HP tractors.

Capex Plans to aid growth

The company is planning to incur a capex of ~INR 1700 mn for technology upgradation and quality improvement across its segments.

Outlook & Valuation

We expect the tractor industry to register a CAGR of 14% over FY12-16E. Escorts is well placed with the introduction of its new products in higher HP tractors segment and commercial tractor segment. The company's focus on increasing its market share in higher margin high HP tractor segment will augur well for the company. We expect the topline & bottomline to register a CAGR of 20% & 55% over FY12-FY14E on account of its recent initiatives of launching new products, increasing dealer network, turning around of construction business and expected rebound of railways segment. We retain our "BUY" recommendation with a revised target of INR 92 (98.5) in 18 months at 5x FY14E EV/EBITDA.

Source : Equity Bulls

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