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ESCORTS LTD
RECOMMENDATION: BUY
TARGET PRICE: RS.204
FY12E P/E: 7.7X
q Escorts reported disappointed set of 1QFY11 results with profits below
our and street expectations.
q Rising commodity prices, higher traded sales (supply of bought outs at
cost for the Tanzanian order) and poor order off-take from Indian railways
led to below expected EBITDA margins and ultimately leading to
poor performance at the net profit level.
q Management has indicated towards improvement in EBITDA margins
from 1QFY11 levels through price hikes, value engineering and other cost
saving and restructuring efforts.
q We are cutting down our FY11E and FY12E forecast to factor in changing
macro environment that includes 1. Increase in raw material prices 2. Rising
financing cost/tight liquidity 3. Poor order flow from the railways
and 4. Expected slowdown in construction related activities.
q Our revised EPS for the company now stands at Rs13.9 (earlier Rs. 19.4)
for FY11E and Rs. 17.1 (earlier Rs.23.1) for FY12E.
q Stock has already corrected significantly in the past one month in view
of the changing macro factors. Currently the stock is trading at attractive
valuations of 9.4x FY11 and 7.7x FY12 estimated earnings. We continue
to retain our BUY rating on the stock with DCF based revised price target
of Rs.204 (earlier Rs.256).
Result highlights
n Revenues for the quarter grew by 38% YoY and 24% QoQ to Rs8,278mn. Revenues
during the quarter received boost from supply of bought outs (at cost) in
order to fulfill its Tanzanian order and that led to higher than anticipated revenues.
n Revenues from the agri-machinery division (AMG) jumped 44% YoY to Rs.7,730
mn on account of increase in tractor sales and higher trading sales.
n Company sold 16,333 tractors during the quarter a 21% jump over 1QFY10 tractor
volumes. Company will launch a new tractor series in Feb2011 and the same
should aid volumes going forward.
n Realizations have improved significantly YoY on account of improved product mix
and price hike. Company will be taking a total price hike of ~3-4% during
2QFY11 of which a part has already been taking Jan 2011 and the remaining will
take effect from starting of March 2011.
n Revenues from the auto ancillary business at Rs250mn was 5.6% higher YoY.
However sequentially it was down by 9.7%.
n Revenues from the railway equipment division (RED) were a major disappointment.
Poor order flow from the Indian railways and delay in implementation of
new technology led to 14% YoY and 23% QoQ decline in RED revenues to
Rs423mn. Current order book for the RED division stands at Rs500mn domestic
and Rs60mn on the export side.
n Sales from the construction equipment division were ~Rs1660mn.
n Escorts reported EBITDA of Rs339mn as against EBITDA of Rs482mn reported
during 1QFY10
n EBITDA margins during the same period were down from 8% to 4.1%. 1QFY11
margins were impacted due to increasing raw material cost and poor performance
from the high margin RED division. Furthermore, during the quarter the
company executed a part of the Tanzanian order that primarily was selling of
bought-outs at cost or at very low margins.
n Going ahead margins are expected to improve over 1QFY11 margins on account
of 1. 3-4% increase in tractor selling prices in 2QFY11 2. Value engineering and
planned reduction in cost conversion cost (like power cost) 3. Taking concrete
measures for turning around the loss making auto ancillary business and 4. Expected
absence of one-off's as witnessed during 1QFY11 (related to Tanzanian
order).
n Other operating income witnessed a decent increase from Rs.59 mn in 1QFY10
to Rs100mn in 1QFY11. Interest cost on the other hand was down from Rs.68 mn
in 1QFY10 to Rs.37 mn for the quarter under review.
n On account lower tax rate provision, net profit for the quarter was up by
8.9%YoY at Rs.255 mn.
Conference call highlights
n Management has indicated towards robust tractor demand in FY11. Company
will be launching a new tractor series in Feb 2011.
n On the auto ancillary division the company is in the process of revamping after
market structure and taking other measures like widening portfolio and brand
strengthening in order to attain quick financial turnaround.
n RED division continues to be marred by lower order off-take and delay in technology
up-gradation from the Indian railways.
n On the capex plan, the company would be spending close to Rs1,450mn on its
AMG business for R&D, debottlenecking and modernization program. The said
amount would be spent over a period of 3 years and the company has already
tied-up for the requisite funding.
Valuation and view
n Good monsoons are expected to be positive for the tractor sales in FY11E. However
at the same time tight liquidity conditions and rising interest rates can play
a spoil sport and limit the growth. We have therefore lowered our tractor sales
volume figures by 4.8% to 67,296 units in FY11 and 74,026 units in FY12E.
n On account of rising input cost scenario, we are lowering our EBITDA margin
estimates to 6.1% (earlier 7.9%) for FY11E and to 6.7% (earlier 8.3%) for
FY12E. We believe the margins to improve from 1QFY11 levels on slew of reasons
mentioned earlier in the report.
n Our revised EPS for the company now stands at Rs13.9 (earlier Rs.19.4) for
FY11E and Rs.17.1 (earlier Rs.23.1) for FY12E.
n Stock has already corrected significantly in the past one month in view of the
changing macro factors. Currently the stock is trading at attractive valuations of
9.4x FY11 and 7.7x FY12 estimated earnings.
n We continue to retain our BUY rating on the stock with DCF based revised price
target of Rs.204 (earlier Rs.256).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
ESCORTS LTD
RECOMMENDATION: BUY
TARGET PRICE: RS.204
FY12E P/E: 7.7X
q Escorts reported disappointed set of 1QFY11 results with profits below
our and street expectations.
q Rising commodity prices, higher traded sales (supply of bought outs at
cost for the Tanzanian order) and poor order off-take from Indian railways
led to below expected EBITDA margins and ultimately leading to
poor performance at the net profit level.
q Management has indicated towards improvement in EBITDA margins
from 1QFY11 levels through price hikes, value engineering and other cost
saving and restructuring efforts.
q We are cutting down our FY11E and FY12E forecast to factor in changing
macro environment that includes 1. Increase in raw material prices 2. Rising
financing cost/tight liquidity 3. Poor order flow from the railways
and 4. Expected slowdown in construction related activities.
q Our revised EPS for the company now stands at Rs13.9 (earlier Rs. 19.4)
for FY11E and Rs. 17.1 (earlier Rs.23.1) for FY12E.
q Stock has already corrected significantly in the past one month in view
of the changing macro factors. Currently the stock is trading at attractive
valuations of 9.4x FY11 and 7.7x FY12 estimated earnings. We continue
to retain our BUY rating on the stock with DCF based revised price target
of Rs.204 (earlier Rs.256).
Result highlights
n Revenues for the quarter grew by 38% YoY and 24% QoQ to Rs8,278mn. Revenues
during the quarter received boost from supply of bought outs (at cost) in
order to fulfill its Tanzanian order and that led to higher than anticipated revenues.
n Revenues from the agri-machinery division (AMG) jumped 44% YoY to Rs.7,730
mn on account of increase in tractor sales and higher trading sales.
n Company sold 16,333 tractors during the quarter a 21% jump over 1QFY10 tractor
volumes. Company will launch a new tractor series in Feb2011 and the same
should aid volumes going forward.
n Realizations have improved significantly YoY on account of improved product mix
and price hike. Company will be taking a total price hike of ~3-4% during
2QFY11 of which a part has already been taking Jan 2011 and the remaining will
take effect from starting of March 2011.
n Revenues from the auto ancillary business at Rs250mn was 5.6% higher YoY.
However sequentially it was down by 9.7%.
n Revenues from the railway equipment division (RED) were a major disappointment.
Poor order flow from the Indian railways and delay in implementation of
new technology led to 14% YoY and 23% QoQ decline in RED revenues to
Rs423mn. Current order book for the RED division stands at Rs500mn domestic
and Rs60mn on the export side.
n Sales from the construction equipment division were ~Rs1660mn.
n Escorts reported EBITDA of Rs339mn as against EBITDA of Rs482mn reported
during 1QFY10
n EBITDA margins during the same period were down from 8% to 4.1%. 1QFY11
margins were impacted due to increasing raw material cost and poor performance
from the high margin RED division. Furthermore, during the quarter the
company executed a part of the Tanzanian order that primarily was selling of
bought-outs at cost or at very low margins.
n Going ahead margins are expected to improve over 1QFY11 margins on account
of 1. 3-4% increase in tractor selling prices in 2QFY11 2. Value engineering and
planned reduction in cost conversion cost (like power cost) 3. Taking concrete
measures for turning around the loss making auto ancillary business and 4. Expected
absence of one-off's as witnessed during 1QFY11 (related to Tanzanian
order).
n Other operating income witnessed a decent increase from Rs.59 mn in 1QFY10
to Rs100mn in 1QFY11. Interest cost on the other hand was down from Rs.68 mn
in 1QFY10 to Rs.37 mn for the quarter under review.
n On account lower tax rate provision, net profit for the quarter was up by
8.9%YoY at Rs.255 mn.
Conference call highlights
n Management has indicated towards robust tractor demand in FY11. Company
will be launching a new tractor series in Feb 2011.
n On the auto ancillary division the company is in the process of revamping after
market structure and taking other measures like widening portfolio and brand
strengthening in order to attain quick financial turnaround.
n RED division continues to be marred by lower order off-take and delay in technology
up-gradation from the Indian railways.
n On the capex plan, the company would be spending close to Rs1,450mn on its
AMG business for R&D, debottlenecking and modernization program. The said
amount would be spent over a period of 3 years and the company has already
tied-up for the requisite funding.
Valuation and view
n Good monsoons are expected to be positive for the tractor sales in FY11E. However
at the same time tight liquidity conditions and rising interest rates can play
a spoil sport and limit the growth. We have therefore lowered our tractor sales
volume figures by 4.8% to 67,296 units in FY11 and 74,026 units in FY12E.
n On account of rising input cost scenario, we are lowering our EBITDA margin
estimates to 6.1% (earlier 7.9%) for FY11E and to 6.7% (earlier 8.3%) for
FY12E. We believe the margins to improve from 1QFY11 levels on slew of reasons
mentioned earlier in the report.
n Our revised EPS for the company now stands at Rs13.9 (earlier Rs.19.4) for
FY11E and Rs.17.1 (earlier Rs.23.1) for FY12E.
n Stock has already corrected significantly in the past one month in view of the
changing macro factors. Currently the stock is trading at attractive valuations of
9.4x FY11 and 7.7x FY12 estimated earnings.
n We continue to retain our BUY rating on the stock with DCF based revised price
target of Rs.204 (earlier Rs.256).
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