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Escorts reported its September year-end results that were slightly
below our estimates. On the topline front, it reported | 2764.7 crore for
SY10 (I-direct estimate: | 2830.7 crore) while for Q4SY10 it was at |
672.1 crore (I-direct estimate: | 688.4 crore) mainly driven by ~32% YoY
volumes growth at 60,086 units. On the EBITDA front, Escorts had a
weak Q4SY10 with margins sliding to 4.9% (480 bps QoQ dip) as certain
expenses (royalties/commissions) increased significantly. This was due
to import of newer technologies with increasing R&D on newer
products and negated benefits related to cost rationalisations measures
undertaken by the company. Escorts reported margins of 8.4% for the
full year at | 231.2 crore and PAT of | 137.6 crore (I-direct estimate: |
160.5 crore). This was boosted by lower interest burden and higher tax
provisions. On a consolidated basis, Escorts reported revenues of |
3,324 crore (up 28% YoY) and PAT at | 132 crore (up 371.4%).
Highlights of the quarter
Escorts’ tractor sales saw a great leap with 60,086 units (up 31.7% YoY)
for SY10 and 13,985 units for Q4SY10 (up 47.5% YoY) on the back of
consistently growing rural demand and newer product launches in the
domestic and exports markets. The construction segment has seen good
traction with volumes for FY10 rising 20.6% to 3,900 units. Also,
importantly, there was strong growth in the prominent earth moving
segment, which comprises ~57% of the market with the introduction of
new backhoe loader (H1FY11 volumes at 169 units compared to 50 in
FY10). However, the railway segment has remained flat with a slower
ordering process. The auto ancillary segment has grown at 30.2% YoY
though operational inefficiencies continue to pull down profitability.
Valuation
The stock is currently trading at | 197, 10.0x FY11E consolidated EPS of |
19.6 and 7.7x FY12E consolidated EPS of | 25.6. We have valued the
business at 9x SY12E EPS of | 25.6 to arrive at a valuation of | 230 per
share. The stock has a 17% upside potential. We have maintained our
BUY rating on the stock.
Agricultural machinery
Escorts has continued the growth momentum built from the start of SY10
and has seen a YoY jump of 47.5% to 13,985 units on the back of rising
farm incomes and improving degree of mechanisation in the Indian
farmland. The volumes could have been much higher if not for high
spillover of festive demand into October, whose benefits would be
reflected in Q1SY11. The management is confident of improving the
volumes and reaching peak utilisation levels from the existing ~62%
levels by FY12.
Railways division
Escorts has been a leading railway machinery manufacturer in India and
has long standing ties with Indian Railways. The company has been a
major supplier of air brakes and brake blocks, which is nearly 45% of the
total volume sold in this segment.
However, SY10 has been a flattish year with revenues at | 197.8 crore in
comparison to | 198.8 crore in SY09. The main reason for the drop in
contribution from railways in SY10 was the delay in receiving approvals
for various orders due to the red tapism attached with in the government
system. The company, however, expects ordering to be robust in the
coming periods. This would also help in improving overall margins as this
segment has traditionally been the highest yielding segment.
Construction machinery
Escorts is the market leader in the pick and carry cranes segment, which
in itself as a product is nearly 27% of the total material handling industry.
The company enjoys a market share of nearly 53% in volume terms in
this segment. The sales for H1FY11 of the same have been ~1,600 units
even in the sluggish part of the year, which had monsoons impacting
construction activity. It is expected to be even more robust in H2 of the
fiscal. The earth moving segment, which comprises ~57% of the
segment, has seen increased growth. The backhoe loaders comprise 26%
of the earth moving segment. Also, post the split of its JV with JCB, with
the addition of new DIGIMAX offering, it has got a strong response as H1
volumes have been at 169 units (FY10 were at 50 units).
Automotive suspension parts
The automotive suspension parts (ASP) business has continued to grow
on volumes with sales increasing 30.2% YoY in SY10. However, the
segment continues to be plagued by higher operational costs due to
production related inefficiencies and lower employee productivity. The
management has highlighted that the business is currently in the low
value segment and costs remain high due to higher available capacities.
However, the company is looking at increasing sales to the OEM segment
that would lead to improvement in margins and profitability.
Outlook
Escorts has continued to improve on volumes and has witnessed a
volume growth of 31.7% YoY for SY10 and 47.5% in Q4SY10. The strong
resurgence in farm output on the domestic scene along with strong
government support to the sector would help maintain the outlook
towards increasing farm mechanisation. Also, R&D activities have been
stepped up. This has also led to newer launches in the Powertrac
segment and is expected to aid tractor sales. Commodity prices have
been a concern for the sector on the whole. However, the tractor segment
has less price sensitivity among consumers. Hence, margins are expected
to have a positive bias. In the construction equipment business, we
expect the company to show increasing gains with its strong entry into
the material handling section through backhoe loaders. The management
is targeting a market share in excess of 10% in the segment, which
currently is in mid single digits. The railway segment is expected to gain
steam as the order book improves in FY11-12 along with the ancillary
segment that is also expected to improve and become profitable post
costs rationalisations and increased OEM sales.
Valuation
Escorts continues to remain strong on volumes in the tractor segment on
the back of continued robust demand from the farm segment. However,
raw material prices continue to remain an overhang for the near term. The
stock is currently trading at | 197, 10.0x FY11E consolidated EPS of | 19.6
and 7.7x FY12E consolidated EPS of | 25.6. We have valued the business
at 9x (20% discount to M&M’s core business) SY12E EPS of | 25.6 to
arrive at a valuation of | 230 per share. The stock has an upside potential
of 17%. We have maintained our BUY rating on the stock.
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