Escorts - Tractor industry improvement drives profits; upgrade to Buy - BRICS

Escorts reported Q3FY13 numbers better than our and Street expectations. Revenue was 7% below our estimates, but up 16% yoy and 18% qoq at Rs11.7bn, with 84% from agri business. EBITDA came in at Rs927mn, resulting in blended margin of 7.9% (our estimate of 7%) PAT was at Rs583mn - up 216% yoy (32% above est). Adjusted for exceptional item, PAT stood at Rs591mn, 33% above estimates. We increase earnings estimate as we upgrade outlook on tractor industry to positive. We increase target price to Rs102 (earlier Rs62) based on DCF method and upgrade stock rating to Buy from Reduce earlier.

Strong tractor growth of 21% yoy and 32% qoq: Revenue was 7% below our estimates at Rs11.7bn, up 16% yoy and 18% qoq. Agri segment contributed Rs9.9bn, up 25% yoy as volume increased 21% yoy to 19,518 units. Realisation fell by 4.45%yoy to Rs602,486 /unit due to surge in volumes. Auto ancillary revenue was down10% yoy to Rs374mn and railway equipments' up 36.7%yoy to Rs537mn. Slow down in industrial growth, infrastructure development and increased competition lead to 32% yoy decline in construction equipment to Rs1.1bn.

EBITDA margins better than expected: EBITDA came in at Rs927mn, up 71.6% yoy and 71% qoq on account of increase in volumes, better product mix and better price realization. As a percentage of net sales, cost of raw materials consumed declined 146bps and other expenditure 37bps yoy. EBITDA margin grew 255bps yoy and 246bps qoq to 7.9% - PBIT margin of agri-machinery was at 11.6% and railways at 10%. Auto ancillaries and construction equipment segments reported negative PBIT Lower tax rate & increase in other income boots PAT: Other income increased 14%yoy and 25.6%qoq. PBT went up 144% yoy at Rs731mn (15.5% above est). Tax rate came in at 19% (compared to 38% Q3FY12) resulted in better than expected Reported PAT at Rs591mn - up 219%yoy and 61%qoq. Adjusted for exceptional item, PAT stood at Rs583mn, 31% above estimates.

Tractor industry performance to improve in FY14

In FY13 tractor industry reported 3% decline in volume, mainly due to high cost of ownership (increase in cost of tractor prices and interest), market price of few food commodities below the MSPs, and weak buyer sentiments. But with good monsoon across India has driven volume growth of 26% yoy for industry and 21% for Escorts. We expect as strong monsoon is expected even till August-September, tractor industry growth for FY14 will be around 10%. Hence we upgrade our outlook on tractor industry to positive.

Upgrade earnings due to change in outlook for tractor industry

We upgrade tractor volume estimates by 14% to 64,311 units for FY13E and 19% to 70,247 units for FY14E to adjust better performance than our earlier estimates (good monsoon). We increase margin estimate to 5.9% and 6.1% for FY13 and FY14. Due to operating leverage advantage (increase in volume), earnings will increase by 72% each for FY13E at Rs15.3 and for FY14E at Rs16.9.

Upgrade target price to Rs102 and recommend Buy

Due to strong increase earnings and impressive performance of tractor industry we upgrade price target to Rs102 (earlier Rs62) based on DCF and upgrade stock rating to Buy from Reduce earlier.

Source : Equity Bulls

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