Escorts Kubota hits new high, surges 8% in 2 days in weak market

Shares of Escorts Kubota hit a new high of Rs 3,125, gaining 4 per cent on the BSE in Friday's intra-day trade, and surging 8 per cent in two days in an otherwise a weak market, on expectation of strong performance from its construction and railway equipment business. In comparison, the S&P BSE Sensex was down 0.37 per cent at 65,010 at 11:33 AM.

In the past two weeks, the stock price of Escorts Kubota has appreciated by 21 per cent. Moreover, in the past one month, it has zoomed 32 per cent as compared to 2.2 per cent decline in the benchmark index.

Escorts Kubota has three business divisions, Agri Machinery – tractors, engine, implements, spare parts and lubes; Construction Equipment – material handing, road compaction and earth moving equipment; and Railway Equipment – brake system, couplers, suspension system, friction and rubber products.

For the June quarter (Q1-FY24), Escorts Kubota had reported the highest-ever quarterly earnings. The company's standalone net profit was up 91.8 per cent year-on-year (YoY) at Rs 282.80 crore, as against Rs 147.5 crore in the year ago quarter.

Earnings before interest, taxes, depreciation, and amortisation (Ebitda) margin improved 404 bps YoY and 324 bps sequentially to 14 per cent, mainly led by operating leverage in construction and railway business sequentially, better realisation and softening in the commodity price.

The standalone revenue from operations was up 15.5 per cent YoY at Rs 2,327.7 crore. Tractor sales volume stood at 26,582 tractors in Q1FY24, as against 26,797 tractors in the year-ago quarter.

Going forward, for FY24, the company expects the domestic tractor industry to register low-single digit growth, led by adequate reservoir levels, better crop prices, better liquidity, and adequate credit availability.

Despite the onset of monsoon, there is a sustained demand for construction equipment industry, led by government thrust and focus on faster execution of infrastructure projects. The management expects current demand momentum to continue going forward and further accelerate post monsoon in balance of the year.

The company’s order book for the railway division at the end of June, 2023 was approximately Rs 950 crore, and the management said the company continues its focus on expansion and diversification of railway business product lines.

The management expects that efforts to augment more coaches and wagons will continue. Growth drivers over the medium to long term include increase in ordering of rolling stock of freight wagons, additional metro projects, introduction of Semi-Hi Speed trains with overall continuous emphasis on the safety and modernisation of Railways.

With the rapid pace of urbanisation and modernisation in India, the future seems bright for Railway Equipment business Division as Indian Railway network is growing at a healthy rate. In the next five years, Indian railway market is expected to be the third largest, accounting for 10 per cent of the global market.

Meanwhile, according to analyst at InCred Capital, Kubota India’s merger with the company is delayed due to some approvals which may take another six months, as per management.

"Exports remain weak in the short term due to global challenges while the Kubota network absorbs 32 per cent of total exports. Commodity prices have declined by ~2.5 per cent from their peak, which is reflecting in the margins. The company has taken price hikes in the middle of June 2023, and the full impact will be visible in the next quarter. The company gave its margin guidance in the range of 13-14 per cent," the brokerage firm said in an auto sector result review report.