ADD on Escorts - Rich product mix leads to margin beat - HDFC Securities

Mr. Aditya Makharia, Institutional Research Analyst, HDFC Securities

Escorts reported record margins of 18.3%, led by a richer product mix and improved operating leverage. Management now expects the tractor industry to grow in low double-digits in FY21 as demand drivers remain firm (record Kharif crop, above average water reservoir levels). We raise our FY21-23 estimates by ~10% to factor in the robust 2Q quarterly performance and set a revised target price of Rs 1,360 at 16x Sep-22E EPS. We retain ADD and would recommend accumulating the stock on declines.

2QFY21 financials: (1) Tractors volumes at 24.4k units grew by ~24/35% YoY/QoQ. The average realisation at Rs 671k was flat YoY, +15% YoY due to higher share from +40HP tractors and recovery in ECE segment. (2) Revenue at Rs 16.3bn grew 24% YoY. The company recorded highest ever EBITDA margin of 18.3% (+880/710bps YoY/QoQ), driven by favourable product mix (benefit of 120bps) as share of 40HP tractor was higher and lower SG&A costs (-350bps YoY). (3) Agri/RED segment's EBIT margin came in at record high of 20.0/20.3%; ECM revenue at Rs 1.57bn grew QoQ (vs. Rs 525mn in 1Q), EBIT margin at 1.7% (vs loss in 1Q). (4) Escorts PAT more than doubled (+102/150% YoY/QoQ) to Rs 2.29bn.

Call and other highlights: (1) Supply chain constraints: Escorts' market share in 2Q at 9.2% has contracted 200/150bps YoY/QoQ as the company is operating at peak capacity (11k units in Sep and Oct-20 each). As the channel inventory is well below normal, the management is confident of regaining its lost share. Escorts, along with Kubota, is increasing capacity to 180,000 units by FY22. (2) Product mix to normalise: The margins were aided by a rich mix with higher sales of 40HP tractors. As construction led demand recovers, the mix is expected to revert towards the 30HP range. (3) Railway segment: The company has Rs 3.5bn+ of order book with an execution timeline of 6-8 months. Railway tenders which were delayed due to COVID, to go back to normal by 4Q. (4) Construction equipment: This segment has recovered from COVID lows, with volumes at 821 units (vs. 234 units QoQ).

Shares of ESCORTS LTD. was last trading in BSE at Rs.1234.75 as compared to the previous close of Rs. 1228.7. The total number of shares traded during the day was 144764 in over 8330 trades.

The stock hit an intraday high of Rs. 1256 and intraday low of 1207.3. The net turnover during the day was Rs. 177757852.

Source : Equity Bulls

Keywords