Escorts stock gains on tractor sales uptick, Budget 2020 proposals

Analysts expect tractors to benefit the most from rural revival

After a strong showing in the December quarter of FY20, Escorts has reported steady sales volume in January, which should keep its stock prices high. 

The stock gained about 9 per cent on Monday on the back of recent tractor sales and Budget proposals to boost rural infrastructure and income.

The proposals in the Budget are expected to boost irrigation infrastructure, higher allocation to farm credit and farm realisations.

On the demand front, the company expects a recovery in tractor sales in the domestic market. Tractor industry volumes, which were down 6 per cent year on year in the quarter ended December 31, are expected to register single-digit growth in the March quarter.

While the company's sales in the first 10 months of financial year 2019-20 are down 8 per cent, for January, it reported domestic sales volume of 5,845 units, up 1.4 per cent YoY. Signs of recovery are also visible in overall tractor registrations for January, which grew by 1 per cent to 52,418 units. 

Analysts at ICICI Securities said the sales are a reflection of better rural sentiment, as compared to urban demand.  

Given its outperformance on the volumes front, Escorts market share grew 50 basis points in the December quarter to 11.9 per cent. One basis point is one hundredth of a percentage point. 

The company believes that after a volume fall in FY20, the sector should see a single-digit growth in FY21. The strong sowing trends of the Rabi crops and subsidies for the tractor industry are expected to drive tractor sales up. 

Analysts at Kotak Institutional Equities expect the FY21 tractor industry volumes to revive on the back of normal monsoons, higher reservoir levels and improving farm prices for Rabi crops. Also, as compared to other auto segments, tractors do not face the headwind related to compliance with BS-VI emission norms.

The positive trend in the stock is also driven by strong December quarter results. The company's operating profit at Rs 212 crore was 20 per cent higher than analyst estimates, led by cost-cutting initiatives and lower commodity prices. 

Brokerages have increased their net profit estimates for FY21 by over 3 per cent due to higher operating profit margins. In addition to the tractor margins, incremental profitability is expected to come from strong railway segment performance.