{LONGTERMINVESTORS} Escorts (ESC IN) - Healthy tractor volume growth increases positive outlook

 

Dear all,

 

Healthy tractor volume growth increases positive outlook

Ø  In 4QFY16, revenues fell by 1.6%YoY to INR 8bn, while tractor volumes grew 7.1% YoY to 11,823 units, due to rural demand on the back of above average monsoon. Realizations declined by 6% due to change in accounting policy where company now reports revenues net of discounts. Export volumes declined by 35%.

Ø  In terms of segment revenue; Agri-machinery (74% of revenue) grew by 0.7% YoY to INR 6.1bn, construction equipments (16% of revenue) de-grew 6%YoY to INR 1.2bn, and Railway equipments (6.5% of revenues) de-grew 3.6% YoY to INR 526mn.

Ø  Agri-machinery segment's operating profit increased by 110.3% YoY to INR 593mn from INR 282mn and operating margin improved 510bps YoY to 9.7%.

Ø  EBITDA increased by 76.2%YoY to INR 388mn and EBITDA margin increased by 210bps YoY to 4.8%, due to lower raw material cost. Raw materials cost as percentage of sales decreased to 69.4% from 70.9%YoY.

Valuation: We expect company to be key beneficiary of revival in rural demand. Strong product portfolio in tractor segment, focus on strengthening other segments like railways, construction equipments are key positives. At CMP the stock trades at 9.6X FY18E, we rate the stock as OUTPERFORMER with target price of INR 200, assigning the PE of 11X FY18E. Risks: Poor monsoon and slow pace in infrastructure spending, delay in agriculture subsidies by the Government.

 

Regards,

CSEC Research

 

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