Accumulate Escorts; target of Rs 1279: Dolat Capital

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Dolat Capital's research report on Escorts

Escorts (ESC) delivered a decent operating performance in Q1FY21 amid a tough environment. EBITDA de-grew 16% YoY to Rs 1.19bn (vs est Rs 1.13bn). EBITDA margin improved 125bps YoY to 11.3% led by better product mix (higher HP tractor) and cost control initiatives. Revenue declined 25.4% to Rs 10.61bn led by 12.7% decline in Agri-machinery products, 75% in construction equipment and 53% in railway equipment. Management stated that the overall rural sentiment is positive because of the record output of Rabi crop and a good early monsoon. Tractor sales grew 22% YoY in June, led by a sharp 60% growth in the southern region. Despite weak Q1, the management expects lower single digit growth for the tractor industry for FY21. The company is operating at 50-60% utilization and is expected to scale up to full capacity by mid-August with smoothening of supply chain and labor issues. As rural demand and the agricultural sector are likely to be the least impacted by COVID-led disruptions with a quicker bounce back compared to the urban counterpart, we believe the tractor segment will outperform other automobile segments. In addition, re-stocking will also aid volume growth in the forthcoming months (overall system inventory stands at ~3.5 weeks which is 50% lower than normal level). Construction equipment and Railway division demand will also improve with revival in the macroeconomic scenario once the COVID-19 pandemic ebbs.

Outlook

We estimate EPS CAGR of 24% over FY21-23E led by 11% growth in Agri-machinery business and 24% growth in other two segments. We roll forward valuation from FY22E to FY23E and value the stock Rs 1,279 (16x for FY23E EPS) and recommend Accumulate rating.

For all recommendations report, click here

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