Maintain ADD on Escorts - Positive demand outlook - HDFC Securities

Mr. Aditya Makharia, Institutional Research Analyst, HDFC Securities

Escorts' 3QFY21 EBITDA at Rs 3.6bn (+18%, -30bps QoQ) was largely in line with estimates. The tractor industry maintains a healthy growth outlook, driven by a good rabi crop and sustained government support. We maintain ADD with a target price of Rs 1,480 at 16x FY23E EPS. Our FY22/23E estimates are largely unchanged. We recommend accumulating the stock on declines.

3QFY21 financials: (1) Tractors volume at 31.5k units grew by ~26/29% YoY/QoQ. The average realisation at Rs 639k was down 2/5% owing to a change in mix (Powertrac's share increased and; sales of sub-40HP tractors increased in the mix as commercial tractor demand revived). (2) Revenue at Rs 20.1bn grew 23.5% YoY. The company recorded an EBITDA margin of 18.0% (-30bps QoQ, +510bps YoY), driven by better product mix and operating leverage. (3) Agri/RED segment's EBIT margin came in at 20/12.7%; ECM revenue at Rs 2.44bn grew 13/56% YoY/QoQ. EBIT margin at 7.5% (vs 4.8/1.7%). (4) Escorts PAT at Rs 2.81bn grew 83/22% YoY/QoQ.

Key highlights: (1) Strong retails: The management highlighted that the retail momentum is strong and supported by higher production levels. While most players have raised inventory, the industry stock levels remain below pre-COVID levels. (2) Commodity cost pressures: In 4QFY21, margins will be impacted by input cost escalation of ~5%, against which the company has already taken a price hike of ~2% in Nov-20. Escorts is planning to take another price increase in early 1QFY22. (3) Railway segment: The company has Rs 3.3bn of order book with an execution timeline of 6-8 months. In FY21, rail revenues remain flat YoY. The tendering process will get back to the pre-COVID level by the end of 4QFY21. With GoI sustaining its commitment to IR, management is confident about the long-term growth potential of this segment. (4) Construction equipment: Segmental volumes grew 20/53% YoY/QoQ to 1,254 units. This segment is expected to grow, given the government's focus on infrastructure.

Shares of ESCORTS LTD. was last trading in BSE at Rs.1383.8 as compared to the previous close of Rs. 1330.4. The total number of shares traded during the day was 216399 in over 9101 trades.

The stock hit an intraday high of Rs. 1423.8 and intraday low of 1308. The net turnover during the day was Rs. 299105064.

Source : Equity Bulls

Keywords