Visit http://indiaer.blogspot.com/ for complete details Escorts Ltd
PRICE : RS.220 RECOMMENDATION : BUY
TARGET PRICE : RS.280 FY11E PE: 10.9X
Leaving its past behind
Escorts is one of the oldest and leading manufacturer of tractors in the
country. Over the years the company has diversified into other
businesses like construction equipment, automotive parts and railway
components. Escorts engineered a turnaround whereby the company
through a major restructuring process exited the non-core and capital
intensive ventures. It used the money raised through sale of various
businesses to scale down its debt levels. Escorts returned to profitability
in FY09 and post that the company's earnings are expected to grow
multi-fold in FY10 (FY ending September). Positive outlook on the current
business will help the company carry on the earnings momentum over
the next couple of years. We initiate coverage on the stock with a BUY
recommendation and a price target of Rs.280.
Key Investment Rationale
q Escorts to ride smoothly on buoyant tractor growth outlook. Over the
past few years India' rural economy has undergone significant structural
changes. Focus on development of rural economy has gained major prominence
which bodes well for the tractor industry. Above normal south-west
monsoon will play a key role in pushing the tractor demand upwards. Escorts
being a significant player in the industry stands to benefit from the overall
positive trend for the tractor demand. For Escorts, we have factored in a 12%
CAGR volume growth over FY10-12E in line with the industry growth expectations.
Increasing tractor volumes for Escorts would mean improvement in
capacity utilization rate for the company from ~47% in FY09 to ~80% by
FY12E.
q Improved growth visibility for ECEL can be a big trigger for Escorts.
Construction equipment business is directly linked to the growth in the construction
activity happening in the economy. This business is all set to ride on
the huge investment expected to be made in the infrastructure related programs.
Escorts is a major player in different segments within the construction
equipment space and is present through a 100% subsidiary - Escort Construction
Equipment Ltd (ECEL). Improving industry dynamics and entry into new
segments will help the company grow its revenues in this segment that had
been stagnant over the past couple of years. Margins too will improve due to
revival in demand and better capacity utilization, we believe.
q Escorts emerges stronger and fitter post restructuring process. Escorts
underwent a major transformation process in the past 7 years from selling
business to reduction in debt and cleaning of balance sheet. The company
exited the capital intensive, non-core business and used the cash generated to
lower its debt. Accordingly the company's debt levels came down significantly
from Rs6.2bn in FY04 to Rs1.6bn in FY09. We believe that the renewed management
focus on its core business is a positive development for the company.
We expect that the future cash flows will be used towards expanding
the current business rather than funding non-core businesses, which was the
case earlier.
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