 "Escorts-tractor")
Shares of Escorts Kubota hit a five-month low, falling 10 per cent to Rs 2,647.45 on the BSE in Friday's intraday trade, after the company reported a 7.2 per cent year-on-year (Y-o-Y) decline in tractor sales at 25,999 units in the December quarter (Q3FY24).
Further, the company expects a 6-7 per cent volume decline for the overall tractor industry in FY24 and a weak Q1FY25 if elections are declared during the said period.
The stock is trading at its lowest level since August 16, 2023. At 10:27 am, Escorts Kubota was quoting 7 per cent lower at Rs 2,726 as compared to 0.04 per cent rise in the S&P BSE Sensex.
In Q3FY24, the company's standalone revenue from operations grew 2.5 per cent Y-o-Y to Rs 2,320 crore. Net profit rose 48.8 per cent to Rs 277 crore over the previous year quarter (Q3FY23). Earnings before interest, tax, depreciation, and amortisation (Ebitda) margin improved 507 bps to 13.5 per cent.
Escorts Kubota's agri machinery products or tractor segment revenues, however, went down 2.9 per cent Y-o-Y to Rs 1,658.3 crore. The company said earnings before interest and tax (Ebit) margin was up 550 bps to 13.8 per cent, led by softening in commodity prices, improved price realisation, and effective cost control measures.
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The management said the domestic tractor industry is expected to see a 6-7 per cent Y-o-Y decline in volumes in FY24, led by a high base of last year, and an erratic and deficient rainfall. Commercial demand is also likely to be soft due to a weakness in construction and mining. Q4 volumes could see a 12-13 per cent Y-o-Y decline.
While the long-term growth outlook remains strong for the construction equipment segment, demand is likely to be weak until Q1FY25 given the upcoming elections, it added.
Motilal Oswal Financial Services expects around 2 per cent volume CAGR for tractors over FY23-26. However, the impact of the high base of FY23 and erratic rainfall, mainly in the western and southern parts of the country, would lead to a 6-7 per cent Y-o-Y decline for the industry in FY24. A faster recovery in other businesses and a ramp-up in its partnership with Kubota would partially offset the cyclical impact of the tractor industry.
"The stock trades at ~34.2x/30.2x consolidated FY24E/25E EPS, representing a premium to its 10-year average of ~16.4x, driven by an improvement in operating parameters as well as the Kubota partnership. Moreover, the valuation also reflects possible opportunities arising from Kubota's parentage (i.e., agri implements, exports, component supplies, etc.) as most of these opportunities will become relevant only beyond FY25," the brokerage firm said in its result update with a 'neutral' rating on the stock.
