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ESCORTS
OUTPERFORMER (RS105, MCAP: RS10BN / US$213M)
• Escorts (ESC), a Nanda Group company, has in the past few years undertaken major business restructuring by exitingbusinesses like telecom, hospitals, etc.. It is now focused on a business model revolving around agri machinery
(Rs25bn of sales in FY10) and construction equipment (Rs5.7bn), besides operating in railway equipment and auto
ancillaries. In the process, ESC has also addressed concerns over its extremely leveraged balance sheet.
• Tractor business on a structural upcycle: ESC’s agri machinery business is witnessing strong growth momentum,
with underlying volumes growing by 15-20%. Given the need for mechanization of farm land, increasing need for
productivity enhancement, higher minimum support price, and expensive farm labor post NREGA, the tractor
industry (with annual sales of over 0.4m units) is poised for 20% growth in the foreseeable future. ESC would derive
growth through increased distribution and new launches for paddy cultivation and in the higher horsepower
segment. ESC sold nearly 60000 units in FY10 and is expected to sell 69000 in FY11 (21000 units sold in the first four
months of FY11). Its current capacity in the tractors business is 90000-100000 units.
• Strong growth in construction equipment; railway equipment and ancillaries subdued: The construction equipment
business has been clocking high growth of 20%+, driven by growth in the Backhoe Loader segment and new launches.
We see growth potential in the construction equipment business given increasing construction activities. However, the
railway equipment business remains subdued on account of a slowdown in government spending. In the auto
ancillary business, ESC has hired a senior official of Amtek Auto and is also in talks with a few OEMs. The business
would continue to be in investment mode over the next couple of years.
• Margins to remain subdued: Increasing commodity prices and adverse mix have impacted ESC’s operating margins
in recent times despite having operating leverage. In the tractor business, margins have been under pressure in the
past quarter as the increase in steel, aluminum and rubber prices have been far ahead of the company’s price increases
in September. ESC affected a price increase of 2-3% in February to offset the impact of commodity prices. However,
we expect margins in the tractor business to decrease yoy. Also, continued investment losses in the auto ancillary
business, degrowth in the high-margin railway equipment business, and faster growth in the low-margin construction
equipment business would keep margins under pressure. We expect a 40bp erosion in FY11.
• Structurally positive, near-term overhangs: Two of ESC’s largest businesses, tractors and construction equipment,
promise to clock high double-digit growth in the next few years. However, the past two quarters of margin
disappointment (higher overheads in Q4FY10 and lower operating margins in Q1FY11) would be a major overhang
on the stock until margins improve in the coming quarters.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
ESCORTS
OUTPERFORMER (RS105, MCAP: RS10BN / US$213M)
• Escorts (ESC), a Nanda Group company, has in the past few years undertaken major business restructuring by exitingbusinesses like telecom, hospitals, etc.. It is now focused on a business model revolving around agri machinery
(Rs25bn of sales in FY10) and construction equipment (Rs5.7bn), besides operating in railway equipment and auto
ancillaries. In the process, ESC has also addressed concerns over its extremely leveraged balance sheet.
• Tractor business on a structural upcycle: ESC’s agri machinery business is witnessing strong growth momentum,
with underlying volumes growing by 15-20%. Given the need for mechanization of farm land, increasing need for
productivity enhancement, higher minimum support price, and expensive farm labor post NREGA, the tractor
industry (with annual sales of over 0.4m units) is poised for 20% growth in the foreseeable future. ESC would derive
growth through increased distribution and new launches for paddy cultivation and in the higher horsepower
segment. ESC sold nearly 60000 units in FY10 and is expected to sell 69000 in FY11 (21000 units sold in the first four
months of FY11). Its current capacity in the tractors business is 90000-100000 units.
• Strong growth in construction equipment; railway equipment and ancillaries subdued: The construction equipment
business has been clocking high growth of 20%+, driven by growth in the Backhoe Loader segment and new launches.
We see growth potential in the construction equipment business given increasing construction activities. However, the
railway equipment business remains subdued on account of a slowdown in government spending. In the auto
ancillary business, ESC has hired a senior official of Amtek Auto and is also in talks with a few OEMs. The business
would continue to be in investment mode over the next couple of years.
• Margins to remain subdued: Increasing commodity prices and adverse mix have impacted ESC’s operating margins
in recent times despite having operating leverage. In the tractor business, margins have been under pressure in the
past quarter as the increase in steel, aluminum and rubber prices have been far ahead of the company’s price increases
in September. ESC affected a price increase of 2-3% in February to offset the impact of commodity prices. However,
we expect margins in the tractor business to decrease yoy. Also, continued investment losses in the auto ancillary
business, degrowth in the high-margin railway equipment business, and faster growth in the low-margin construction
equipment business would keep margins under pressure. We expect a 40bp erosion in FY11.
• Structurally positive, near-term overhangs: Two of ESC’s largest businesses, tractors and construction equipment,
promise to clock high double-digit growth in the next few years. However, the past two quarters of margin
disappointment (higher overheads in Q4FY10 and lower operating margins in Q1FY11) would be a major overhang
on the stock until margins improve in the coming quarters.
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