Market share gains outweigh volume growth worries for Escorts: Analysts

Prediction of near-normal rains a relief on the tractor sales front

Escorts lagged the broader markets by a huge margin–down 20 per cent—in the last financial year but the tractor company’s shares are preferred still because of market share gains and better volume growth.

India Meteorological Department’s forecast this week of near normal monsoon rains and the company’s initiatives should help Escorts tap incremental demand and gain market share.

Escorts has gained 100 basis points market share in FY19 to 11.8 per cent. With the volume base not expanding much for the sector, experts say most of the gains have come from other players like Mahindra and Mahindra. Escorts plans to take its market share to 15 per cent to 16 per cent by FY22. A large chunk of the improvement has come on the back of better product offering with margins too expected to strengthen over time. From a near 11 per cent mark in FY18, analysts expect Escorts to close FY19 with operating margins of 12–12.5 per cent. Market- and application-focused new product launches and dual brand strategy, namely Farmtrac and Powertrac has worked in Escorts’ favour, apart from a slew of cost optimisation and non-core investment divestments.

Analysts at Antique Stock Broking add that greater focus on crop- and market-specific products, distribution strengthening in weak territories and greater participation in subsidy-linked volumes are likely to help Escorts going forward in terms gaining market share.

With these favourable factors in place, analysts believe Escorts has the rights elements to tide over the possible slowdown in the tractor sector. “The company has been diversifying its earnings through stronger growth in farm implements and tractor exports, widening its addressable market in the construction equipment business, and launching new products in the railway business,” they spell out. 

However, the key risks to its earnings are its concentration risk and a spell of weak monsoon. Escorts is concentrated in North and East India and relies heavily on these markets. With these regions more prone to slowdown in agricultural activities if monsoon fails, volumes may of the company might be impacted in FY20. However, with weather department expecting a near-normal monsoon this risk is receding. The other positive is valuations which at 12x FY20 earnings are attractive.