Tractor growth, partnership with Japan's Kubota key triggers for Escorts

Gains in market share, margins, and new launches are already priced in

A better-than-expected June quarter performance and expectations of steady growth in FY21 led to a 4.5 per cent gain for the Escorts stock. The outperformance was because of a better product mix and lower expenses, which resulted in higher realisations and margin expansions. The operating front gains came despite a 14 per cent year-on-year (YoY) fall in tractor volumes. Agri machinery (tractors) is the largest of the three segments Escorts is in, and accounts for 80 per cent of its revenues. 

The operating profit margin expanded by 130 basis points YoY to 11 per cent as compared to Street estimates of about 9 per cent. The gains were on account of lower commodity costs and a higher share of tractors in the 40 horsepower and above segment, which fetches better margins. Lower discounts and other expenses added to the profitability. The lockdown resulted in a fall in marketing and general administration spends.

While the margin in the tractor segment improved 355 basis points YoY to 14.5 per cent, the margin in the railway segment was down sharply to 2.6 per cent, from 20 per cent. The construction equipment segment reported a loss at the operating level. The company expects volumes in the segment to improve in the second half of the current financial year. Escorts is looking at bringing down its fixed costs by up to 15 per cent this year.

 

 

What may play spoilsport going ahead are supply-side issues for the tractor segment. The company is operating at 50-60 per cent capacity because of supply disruptions related to fuel injection systems from Bosch. These issues are likely to be resolved over the next three weeks. The company expects the tractor sector to grow by low single digits in FY21, which, given the double-digit decline in the first quarter, will translate into 10 per cent growth during the rest of the year.

Growth in tractor volume estimates is based on a strong rabi season, steady kharif sowing, normal monsoons, and an improvement in the availability of finance. In addition to market share gains, led by new product launches, triggers for the stock include the partnership with Japan’s Kubota which is likely to help improve Escorts’ competitive positioning in tractors and construction equipment in the Indian market and expand its presence in export markets, say analysts at Motilal Oswal Financial Services. While brokerages have revised their earnings estimates upwards, most gains are already factored in the price. The stock is trading at a 25 per cent premium to its five-year average of 12.5 times its price-to-earnings ratio.