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Escorts -Margin plays hide-and-seek; new fiscal, fresh outlook
India Equity Research I Auto & Auto Ancillaries
Result Update
India Equity Research
Escorts (ESC) reported 10% y-y growth in standalone revenue in 4Q FY10 to Rs6.7 bn, led
by 8.2% growth in tractor volume. FY10 standalone revenue grew by 26.4% to Rs27.6 bn,
primarily led by a 32% jump in tractor volume to 60,086. The construction equipment
segment (ECE) revenue grew by 30% y-y to Rs6.1 bn, leading to FY10 consolidated
revenue growth of 27% to Rs33.8 bn. On the standalone operating margin front, the
company disappointed by reporting a drop of 480bp q-q to 4.9%, led by a sharp jump in
other expenditure due to scattered accounting strategy followed by management. Other
expenditure/sales jumped to 18.1% this quarter against the first three-quarter average
of 12.5%, resulting in a full-year figure of 13.8% at par with the FY09 figure. We revise
our consolidated revenue figure for FY11E and FY12E to Rs37.8 bn and Rs44.8 bn and cut
our operating margin by 90bp and 120bp to 8.4% and 9.1%, respectively. We reiterate
our BUY rating on ESC with a revised 12-month PT of Rs267 (from Rs300) based on 6x
FY12E EV/EBITDA (at a 25% discount to a five-year average traded forward multiple).
In-line revenue; we are factoring in a 15% revenue CAGR during FY10-12E: Standalone
revenue for 4Q FY10 grew by 10% y-y to Rs6.7 bn, led by an 8.2% rise in tractor volume.
For FY10, standalone revenue was up 26.4% to Rs27.6 bn, with tractor volume growing by
32% y-y to 60,086. ECE revenue grew by 30% y-y to Rs6.1 bn, leading to consolidated
revenue growth of 27% to Rs33.8 bn. We expect consolidated revenue to grow at a CAGR
of 15% to Rs44.9 bn in FY12E, led by a 14% volume CAGR in tractors.
Margin plays spoilsport; scattered accounting treatment of other expenditure leading to
lack of relevance of first three-quarter margin: ESC reported a standalone operating
margin of 4.9% this quarter, down 480bp q-q, led by a 630-bp rise in other
expenditure/sales. As per management, scattered accounting of fixed cost elements led to
skewness in other expenditure elements getting accounted in 4Q, although on a y-y basis
other expenditure for FY10 was at par with FY09 at 13.8%. Against a first three-quarter
average other expenditure of 12.5%, the balancing act in 4Q would give us the lack of
clarity on actual operational performance based on the upcoming quarter numbers,
signifying incremental stress to be given to gross margin rather than operating margin. For
FY10, standalone operating margin contracted by 100bp to 8.4%, primarily led by higher
RM costs. At the consolidated level, margin contracted by 110bp to 7.3% in FY10. We are
modelling operating margin levels of 8.4% and 9.1% in FY11E and FY12E, respectively.
Consolidated ROCE improves to 10%; expect it to improve to 16-18% in FY12E: ESC
reported a ROCE of 10% in FY10, primarily led by improved capital intensity through higher
tractor volume. We believe, on the back of requirement of nominal capex in FY11-12E and
scope of improvement in margin, ESC can generate free cash flow to the extent of Rs6 bn
on a cumulative basis between FY11-12E along with driving the ROCE up to 16-18% levels.
Re-iterate BUY with revised 12-month PT of Rs267 (Rs300 earlier): We re-iterate our BUY
on ESC with a revised 12-month PT of Rs267 based on 6x FY12E EV/EBITDA (based on
target multiple at 25% discount to 5-year average traded forward multiple). At our target
price we expect ESC to trade at 10.6x FY12E earnings on the back of expected 42%
earnings CAGR between FY10-12E. Inability to improve tractor market share, improve
margin in core agri machinery business along with ECEL are the major risks to our
estimates and in turn our price target.
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