Escorts Ltd - Ready for next leg - PhillipCapital

- We interacted with Escort's entire top management and it bolstered our positive view on the company further

- Escorts expects both segments - tractor and construction equipment - to post strong double-digit growth in FY18

- It is eyeing at least 50bps increase in tractor market share in FY18, mainly led by a strong marketing push, recovery in core markets, and seeding new villages

- Railways' order flow has strengthened further - to Rs 1.5bn vs. Rs 1.3bn in December 2016. Sees 20%+ CAGR in railways

- Cost cutting to continue, and could add 200-300bps to EBIT margins in 2-3 years

- We remain positive on Escort's outlook as both the industries - tractor and construction equipment - remain on a strong footing, coupled with its measures to cut costs and gain share. We raise our FY19 EPS estimates by 12% and reiterate BUY with a revised TP of Rs 800 (Rs 550 earlier)

Tractor industry vibrant, northern states growing

After a sluggish two years, the tractor industry saw robust 18% volume growth in FY17; we see this momentum continuing and estimate 10% growth in FY18 (read our detailed industry analysis here). We see 40bps market share gain in FY18 led by: (1) northern markets (traditionally strong for Escorts) posting a strong volume pickup in FY18, and (2) new launches. Tractor margins should improve to 13% in FY19 from 10.4% in FY17 - led by cost cutting and operating leverage.

Construction equipment to fire up

After a strong revival in the tractor segment, the management is now channelizing its energy into reviving its construction-equipment division, which has been bleeding from the last four years. Escorts has begun a raw-material rationalisation program (like the one it implemented for tractors), which the management sees leading to 4-6% EBIT margin for the division in FY19. With an expected pickup in infrastructure activity, new launches, and the company strengthening its sales network, we see this division posting strong 20% revenue CAGR over FY17-19 and a 4% EBIT margin in FY19.

Railways on a strong footing

Escorts has seen a 4x increase in its railways order book over the last four quarters - to Rs 1.6bn from Rs 0.4bn. A large chunk of this order-book surge is due to growth in traditional products (such as good orders for couplers for LHB Alstom coaches). Of the Rs 1.6bn order book, new products contribute c. 30%. With Escorts now starting to receive BMBS (Bogie mounted brake systems) and AMBS (Axle mounted brake systems) orders in full flow, and with the impending approval of locomotive brakes from railways, we see growth momentum continuing with 20% revenue CAGR. Escorts has been working on getting more orders from the metro segment, which is another impetus for growth.

Valuations

We believe Escorts is well-placed, with outlook for tractors looking bright, railways' segment gaining strong orders, and construction-equipment division likely to turn profitable. We increase our FY19 earnings by 12% as we see robust volume and margin improvement across segments. We also increase our target to Rs 800 (Rs 550 earlier) and increase our target multiple to 15x FY19 EPS (adjusted for treasury shares), based on continued momentum in tractor-industry growth, consistent financial improvement, and robust outlook.

Shares of ESCORTS LTD. was last trading in BSE at Rs.748.85 as compared to the previous close of Rs. 748.9. The total number of shares traded during the day was 183427 in over 3794 trades.

The stock hit an intraday high of Rs. 756.95 and intraday low of 742.5. The net turnover during the day was Rs. 137571106.

Source : Equity Bulls

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