ESCORTS Disappointing quarter:: Edelweiss

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n Disappointing quarter; PAT well below estimates
Escorts’ Q4FY10 PAT, at INR 114 mn (down 81% Y-o-Y, 75% Q-o-Q), was well
below our estimate of INR 380 mn. The key disappointment on EBITDA margins was
on account of higher-than-expected other expenses (up 47% Y-o-Y, 27% Q-o-Q).


n EBITDA margin declines ~450bps Q-o-Q; other expenses jump 600bps
The company’s top line declined 17% Q-o-Q, as volumes dipped 22% Q-o-Q
(versus Edelweiss estimates of a 14% decline) though realisation per vehicle
improved 6% Q-o-Q, restricting the overall decline.

In Q4FY10, EBITDA margin declined by over 450bps to 5.2% despite gaining on
decline in staff costs (down 130 bps Q-o-Q) and material costs (down 50bps Q-o-
Q). Other expenses (up 27% Q-o-Q, 620bps Q-o-Q) however disappointed certain
year end expenses (notably royalty / commissions) were charged in the current
quarter. We note that the director’s fees/ commissions (increasing to INR 103 mn
in FY10 from INR 3 mn in FY09) and royalty expenses (up to INR 140mn from INR
57mn) formed 11% of the company’s FY10 PBT.

n Construction equipment business margins skid
While sales from Escorts Construction Equipment, (a 100% subsidiary,
contributing to 17% of consolidated revenues) at INR 5.7bn was up 38% Y-o-Y;
EBIT margins declined to 2% (down 100bps Y-o-Y). This may have been due to
costs associated with new products being introduced.

n Balance sheet strong; turnaround in subsidiaries
Over the past year, the company has successfully re-engineered its balance sheet
with the D/E ratio now at a comfortable 0.2x. Consolidated profits were greater
than standalone profits indicating that the loss making subsidiaries may have
turned around.

n Outlook and valuations: Rough quarter; maintain ‘BUY’
Escorts’ Q4 results were below par, largely on account of the higher
royalty/commission expenses. Hence, we revise our earnings estimates for FY11E
and FY12E downwards by 20% and 15%, respectively.

Nonetheless, we note that the tractor business is on a structural upswing. The
stock currently trades at attractive valuations of 12.3x FY11E and 9.8x FY12E.
Also, upsides from the construction business could be substantial. We maintain
‘BUY’ recommendation on the stock.