has given a buy rating to Escorts Ltd with a 12-month target price of Rs 1,103 based on 16 times FY22E core EPS.

Tractor volumes have recovered with a flat performance in May’20 on positive customer sentiment, owing to pent-up demand, healthy Rabi output and expectations of a good monsoon in 2020. Led by expectations of a strong recovery, the brokerage has increased Escort’s FY21 tractor volume estimate by 10 per cent to 85,765 units and FY22 volume forecast by 3 per cent to 98,226 units. The brokerage expects volumes to grow at a 7 per cent CAGR over FY20-22E.

According to the brokerage, a 9 per cent CAGR in revenues and a 20 per cent CAGR in earnings over FY20-22E can be expected, driven by volume up-cycle and margin expansion.


Investment Rationale

The brokerage expects Escorts to sustain the market share in domestic tractors going ahead, led by the continuation of aggressive marketing efforts, the success of its dual-brand strategy – Farmtrac and Powertrac, and the focus on network expansion. Recently, the company has strengthened its tie-up with Kubota Japan, which took a 10 per cent equity stake in Escorts. Led by higher volume and margin assumption, the brokerage has raised its FY21E/22E EPS estimate by 20 per cent/8 per cent to Rs 48.7/ Rs 69.8. It expects a 9 per cent CAGR in revenues and a 20 per cent CAGR in earnings over FY20-22E, with an average ROCE of 17 per cent and free cash flow (FCF) of Rs 3 billion/year.

Net cash position is strong at Rs 9.5 billion in FY20, which is expected to increase to Rs 23.9 billion by FY22E. The brokerage has applied a higher multiple, factoring impending tractor upcycle and benefits of strategic alliance with Kubota.

According to the brokerage, key downside risks include a deficient or weak spread of monsoon, delay in macro recovery, rise in competition, and adverse movement in currency/commodity prices.

Financials

For the quarter ended March 31, 2020, the company reported consolidated sales of Rs 1385.65 crore, down -16.03 per cent from last quarter sales of Rs 1650.22 crore and down -15.97 per cent from last years same quarter sales of Rs 1649.08 crore. The company reported net profit after tax of Rs 129.22 crore in the latest quarter.

Promoter/FII Holdings

Promoters held 40.25 per cent stake in the company as of March 31, 2020, while FIIs held 19.28 per cent, DIIs 9.94 per cent and public and others 30.5 per cent.

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