Dear Investor, Escorts Ltd CMP : 89 Target : 116 Upside : 30% Rating: BUY Escorts has moved up significantly since our initial Stock Idea on July 5 at Rs 74.4 and reached the target of Rs 90. Now, post the Q3FY13 results we see further upside in the stock and maintain our BUY rating and raise our target to Rs 116. Stellar Performance in Q3FY13 (Sep ending) Escorts reported splendid results for Q3FY13. Net sales increased by 16% yoy to Rs 1176 cr driven by strong growth numbers from the Agri Machinery segment. EBITDA went up by 71.6% to Rs 92.7 cr while margin increased to 7.9%, the highest in the past 12 quarters, growing by 256 bps yoy. Price hike in the months of Feb and May, change in product mix and better cost control led to improvement in EBITDA margins. Net profit more than tripled from Rs 18.5 cr in Q3FY12 to Rs 58.3 cr in Q3FY13 as interest costs declined by 14.5% to Rs 20.2 cr. Increasing realization from the tractor segment: Escorts is witnessing improved realization in the tractor segment which contributes ~75% to the topline of the company. Despite price increases taken by the company in Feb and May 2013 tractor volumes have seen an uptrend. It increased by 21.4% in Q3FY13 with average realizations increasing by 2.9% yoy. Revenues from this segment increased by 24.9% leading to an 16% overall growth in revenues. Strong growth was attributed to price hikes of Rs 2000 in Feb and Rs 5000 in May coupled with lower discounting and change in product mix as customer preference shifting towards higher HP tractors.. Escorts has entered into partnership with BCS S.p.A of Italy to distribute and sell speciality Ferrari brand of tractors in India which would help to maintain sales momentum. It is looking to launch new tractors for export market and expects sales to gain traction in the coming year Capacity addition in Construction Equipment division: Construction equipment division continued to be impacted by the slowdown in the economic activity due to the tough macroeconomic scenario. Revenues from this segment declined by 31.6% to Rs 109 cr. The management expects revival in demand and doubling its capacity by incurring a capex of ~Rs 40 cr. The new capacity is expected to begin production by FY14 onwards. Robust performance in the railway division: Railway equipment division posted robust numbers with revenues increasing by 36.7% yoy in Q3FY13 to Rs 53.7 cr. Margins witnessed an increase of 803 bps yoy to 10.1%. The management is confident of sustaining the improvement in this segment as most of the new products are under validation cycle of the Indian Railways. The company expects strong order flows in the coming years. It has done technical collaboration with Dako & Ingeteam for technological enhancements. Increasing market share in Maharashtra and Andhra Pradesh: Escorts is a marginal player having a share of ~4-5% in the high HP dominant markets of Maharashtra and Andhra Pradesh. The company is targeting to increase its share from the current levels to its national average of ~12%. Gradual increase in market share in these two states would provide better margins through increasing sales of higher HP tractors. Valuation & Outlook: With good monsoons we expect the sales momentum company to continue. Price hike undertaken by the company in May against discounts being offered by competitors, will help to sustain and further improve margins. Also the management has said that it would focus on margins rather than volumes company is making a conscious decision of moving to the higher horsepower tractors (40-50 bhp) which would give them higher inroads into Maharashtra and AP. Escorts currently trades at a PE of 6.5x of its FY14E earnings and can be bought at current levels with a target of Rs 116. With Warm Regards, RATAN VYAS | Regional Director. Systematix Shares & Stocks (I) Ltd. BRANCH: BLOCK NO.1 REKHA BLDG NAHUR ROAD MULUND WEST MUMBAI 400080 CORPORATE OFFICE: J.K Somani Building, 2nd Floor, British Hotel Lane, Fort. Mumbai- 400001 Board: +91-22-5913123/5923123 Direct: +91-9769407399 Website: systematixshares
Posted on: Sun, 25 Aug 2013 12:17:49 +0000
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