Escorts - Lowered demand guidance - HDFC Securities

Mr. Aditya Makharia, Institutional Research Analyst, HDFC Securities

Escorts reported 4QFY21 PAT of INR 2.7bn (-3% QoQ). However, the tractor industry outlook is uncertain with the management guiding for low to mid- single-digit growth in FY22E, as demand in the important pre-monsoon season has been impacted by COVID. We are lowering our FY22E tractor volume growth estimate to 2% YoY (vs. 8% earlier). Our target price is lowered to INR 1,300 as we now value the stock at 14x (vs. 16x earlier), to factor in the lower demand outlook after a robust FY21 (sales were up +24% YoY).

4QFY21 financials: (1) Tractor volumes at 32.6k units grew 3% QoQ (+62% YoY). The average realisation at INR 678k grew 6% QoQ, resulting in a 10% growth in revenue. The EBITDA margin of 15.6% (-245bps QoQ) was impacted by higher raw material costs (66% of sales vs 62/66 YoY/QoQ). (2) Agri/ECM/RED segment's EBIT margin came in at 17.0/7.3/19.1% (-300/- 30/+650bps QoQ). (3) Escorts' PAT at INR 2.7bn declined 3% QoQ.

Key highlights: (1) Lower guidance: Despite favourable macroeconomic drivers of the tractor industry, volumes are likely to be impacted by the ongoing COVID situation and a higher base of FY21. Management guided for low to mid-single-digit growth for the overall tractor industry. (2) Commodity cost pressures: Margins are impacted by the sharp rise in input costs. The management expects additional inflation on the material costs. To offset the above, the company has taken two price increases in mid-Nov'20 and Apr'21 of a combined 5%; and one more can be expected in 2QFY21. However, even after passing on the higher costs, margins will be likely impacted by 100-150bps. (3) Non-agri segment: The industry may witness higher purchases from the infra/non-agri segment as the economy opens up. This segment is likely to be 30-35% of sales in FY22, as against 20-25% in FY21. (4) Kubota JV: Escorts has started exports to the Kubota channel and entered four markets (plans to open more markets this year). ~5,400 units were produced last year from the JV.

Shares of ESCORTS LTD. was last trading in BSE at Rs.1141.4 as compared to the previous close of Rs. 1164.75. The total number of shares traded during the day was 186318 in over 11944 trades.

The stock hit an intraday high of Rs. 1171.15 and intraday low of 1113.05. The net turnover during the day was Rs. 210757684.

Source : Equity Bulls

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