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Core business cost control poses a challenge…
Escorts reported its Q2SY11 results that were below our expectations
with the topline reported at | 901.8 crore, up 33.5% YoY (I-direct
estimate: | 914.6 crore). It was mainly driven by 21.5% YoY volume
growth at 17,762 units and realisations improving ~8.0% YoY adjusted
for trading & bought out orders. EBITDA margins were below our
estimates at 6.4% (up 120 bps QoQ) due to higher input costs per vehicle
(4.2% QoQ) and increase in trading expenses (3.0% YoY) towards the low
margin trading order. PAT was reported higher at | 73.2 crore due to the
tax write-back of ~| 33 crore on foreign receivables earlier provided for
as bad debt. Construction subsidiary ECEL posted a topline for H1SY11 of
| 380 crore with EBITDA and PAT margin at 4.5% and 3.4%, respectively.
Highlights of the quarter
Escorts’ tractor sales continued to witness strong volume growth with
quarterly sales of 17,762 units (21.5% YoY jump) as demand in rural
markets with the impending Rabi crop has remained positive. Escorts has
launched the “Jai Kisan” series in March 2011. This was also marked by a
price hike of ~| 16,000 on a blended basis. On the other businesses front,
auto ancillaries have shown some smart growth with 51.8% QoQ growth
with increasing supply to OEMs. RM prices, through steel and rubber,
have continued to increase (4.2% QoQ/per unit). The price hike
undertaken has just covered this cost rise. The margin slide (338 bps YoY)
failed to get arrested due to strong cost pressures on the core business
front, which Escorts has failed to control. Another surprise came from the
fact that Escorts received a tax write-back of ~| 33 crore.
Valuation
We have factored in a modest topline performance but expect the
operational performance to remain subdued. The stock is trading at | 127,
7.7x SY12E consolidated EPS of | 16.5. We have valued it on an SOTP
basis with Escorts valued at 8x SY12E EPS of | 16.5 while the subsidiary
is valued at | 3.5 with a target price of | 136. We have changed our rating
from BUY to HOLD. We suggest that investors who entered at higher
levels hold the stock and look at entry again if the stock falls severely
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Core business cost control poses a challenge…
Escorts reported its Q2SY11 results that were below our expectations
with the topline reported at | 901.8 crore, up 33.5% YoY (I-direct
estimate: | 914.6 crore). It was mainly driven by 21.5% YoY volume
growth at 17,762 units and realisations improving ~8.0% YoY adjusted
for trading & bought out orders. EBITDA margins were below our
estimates at 6.4% (up 120 bps QoQ) due to higher input costs per vehicle
(4.2% QoQ) and increase in trading expenses (3.0% YoY) towards the low
margin trading order. PAT was reported higher at | 73.2 crore due to the
tax write-back of ~| 33 crore on foreign receivables earlier provided for
as bad debt. Construction subsidiary ECEL posted a topline for H1SY11 of
| 380 crore with EBITDA and PAT margin at 4.5% and 3.4%, respectively.
Highlights of the quarter
Escorts’ tractor sales continued to witness strong volume growth with
quarterly sales of 17,762 units (21.5% YoY jump) as demand in rural
markets with the impending Rabi crop has remained positive. Escorts has
launched the “Jai Kisan” series in March 2011. This was also marked by a
price hike of ~| 16,000 on a blended basis. On the other businesses front,
auto ancillaries have shown some smart growth with 51.8% QoQ growth
with increasing supply to OEMs. RM prices, through steel and rubber,
have continued to increase (4.2% QoQ/per unit). The price hike
undertaken has just covered this cost rise. The margin slide (338 bps YoY)
failed to get arrested due to strong cost pressures on the core business
front, which Escorts has failed to control. Another surprise came from the
fact that Escorts received a tax write-back of ~| 33 crore.
Valuation
We have factored in a modest topline performance but expect the
operational performance to remain subdued. The stock is trading at | 127,
7.7x SY12E consolidated EPS of | 16.5. We have valued it on an SOTP
basis with Escorts valued at 8x SY12E EPS of | 16.5 while the subsidiary
is valued at | 3.5 with a target price of | 136. We have changed our rating
from BUY to HOLD. We suggest that investors who entered at higher
levels hold the stock and look at entry again if the stock falls severely
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