Escorts - Improvement in Business Performance on Track; Re-rating on Cards – Reiterate BUY - Karvy

Escorts remained in India's Top-3 tractor manufacturer with very strong position in 31-50 HP segment. Moreover, its 93% of volume share comes from 31-50 HP segment compared to 77% volume share of the segment for the industry. Escorts' market share stands at ~10% in domestic industry, while its share is ~12% within 31-50HP segment. Focus on higher HP segment and brand building have begun paying off, as Escorts' operational efficiency improved over last one year, in the aftermath of change in top management. Its average realization improved by >5% YoY, while its net revenue grew by 7% YoY to Rs. 41.6bn in FY13, despite 30% decline in revenues from construction equipment business.

Better Monsoons to Drive Tractor Volume; Construction Equipment Biz to Recover in FY15E: Better monsoons and favourable monsoon distribution would result in healthy crops for Rabi season, which would translate into strong rural economy and healthy tractor sales, going forward. Moreover, we expect strong economic recovery in FY15E, which would bring back cheers for Escorts in its construction equipment business. We expect Escorts' profitability to improve on account of its focus on pricing power, higher HP tractors and brand building.

Outlook & Valuation

Historically, the stock traded at 9.5x P/E, while due to some managerial issues, it de-rated to below 7x during past 2 years. We believe that improvement in Escorts' financial performance, new management with business focus and rising return ratios would leave behind past issues and stock would be rerated close to its historical valuation multiples. We reiterate our "BUY" recommendation on Escorts and upwardly revise our target price to Rs. 165 per share (from Rs. 122 earlier) valuing the stock at 9.5xFY14E EPS (Adjusted EPS for Oct'13 to Sep'14).

Source : Equity Bulls

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