ESCORTS LTD: 4QFY10 results were disappointing--Kotak Sec

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ESCORTS LTD
PRICE: RS.190
RECOMMENDATION: BUY
TARGET PRICE: RS.256
FY11E P/E: 9.8X

q Escorts 4QFY10 results were disappointing on the operating margin
front.
q Standalone results in particular was marred due to slightly lower tractor
sales and higher other expenses.
q On the consolidated basis, despite drop in margins in FY10 net profit
was in line on back of lower than anticipated net interest cost.
q On the positive front, the railway equipment division (RED) showed improvement
both on the revenue and the margins side during 4QFY10.
q We remain positive on the company's business over the next one year.
Good monsoons are expected to keep the robust tractor demand intact.
q Construction equipment business too seems to be picking up given the
huge investments happening in the construction and infrastructure
space.
q We are lowering our FY11 and FY12 estimates given the fall in margins
during 4QFY10.
q Stock has corrected by 10% post results. We continue to maintain our
BUY rating with a reduced price target of Rs256 (earlier Rs280).




4QFY10 - Standalone results
Margins disappoints, PAT below expectations
n Standalone revenues for the company during 4QFY10 increased from Rs5,989mn
to Rs6,676mn translating into a YoY growth rate of 11.5%.
n Revenues were lower than our expectations primarily due to lower than anticipated
tractor sales during the quarter.
n On the sequential basis RED division has shown 25% jump in revenues which is
positive for the company as this division enjoys lucrative margins vis-à-vis other
segments.
n Escorts disappointed on the margins front with EBITDA margin of 4.2% as
against EBITDA margin of 10.8% and 9.1% reported during 4QFY09 and
3QFY10 respectively.
n Sharp increase in other expenses during the quarter was the prime reason for the
decline in EBITDA margin during the quarter.
n On the positive note, the company has shown sequential margin improvement in
the RED division.
n Deprecation during the quarter was down YoY but similar on QoQ.
n Due to reduction in the debt levels the company net interest cost came down
from Rs87mn in 4QFY09 to Rs61mn during the quarter under review.
n Escorts reported income from exceptional items to the tune of Rs155mn during
the quarter due to provision write back.
n During 4QFY10 the company provided Rs56mn towards tax provision as against
tax write back of Rs68mn provided during 4QFY09.
n Due to poor operating performance, standalone PAT for the quarter stood at
Rs268mn as against PAT of Rs600mn reported during 4QFY09.
n During the quarter the company allotted 4.2mn shares at a premium of Rs135
towards conversion of 61,455, 4.25% secured convertible debentures issued to
the QIB's.


FY10 - Consolidated results
PAT grows multifold helped by sharp drop in net interest cost
n Consolidated revenues for the company grew by 28% in FY10 to Rs33,242mn (in
line with our estimate of Rs33,768mn) driven by both the agri-machinery business
(AMG) and the construction equipment division.
n Tractor industry witnessed a sharp jump in tractor demand and Escorts being a
major tractor player benefitted from the same.
n Construction equipment business is recovering after facing a difficult time post
economic slowdown.
n EBITDA grew by 21% from Rs1,577mn in FY09 to Rs1,909mn in FY10.
n Increased input cost pressures, higher other expenses in 4QFY10 and poor show
from the railway equipment division in 2HFY10 led to marginal dip in EBITDA
margins for the company.
n EBITDA margin on consolidated basis fell from 6.1% to 5.7% in FY10 and was
lower than our expectation.
n Escorts net interest cost came down substantially during FY10 from Rs674mn in
FY09 to Rs181mn in FY10. Debt levels for the company have come down from
Rs8.4bn in FY08 to Rs4bn in FY10.
n During the year the company made an extra ordinary gain of Rs57mn as against
loss of Rs285mn in FY09.
n Accordingly the company showed substantial 363% jump in reported PAT that
increased from Rs286mn in FY09 to Rs1,323mn in FY10 and was in line with our
expectation of Rs1,347mn.


Valuation and Outlook
n We remain positive on the company's business over the next one year. Good
monsoons are expected to keep the robust tractor demand intact.
n Construction equipment business too seems to be picking up given the huge investments
happening in the construction and infrastructure space.
n Escorts margins in FY11 is expected to improve over FY10 given the positive industry
outlook for the tractor and construction equipment businesses. Furthermore
the railway equipment division has showed increase in margins during
4QFY10 with further scope for improvement.
n However, given the company's disappointing performance on the margin front
during Q4FY10, we are lowering our margin estimates for FY11E and FY12E.
n Accordingly our revised net profit estimates now stands at Rs1,847mn (earlier
Rs1,931mn) for FY11 and Rs2,206mn (earlier Rs2,398mn) for FY12E.
n We lower our DCF based target price to Rs256 (earlier Rs.280). Stock price has
corrected by 10% post results. We thereby continue to maintain BUY on the
stock despite reduction in price target.