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ESCORTS LTD
RECOMMENDATION: ACCUMULATE
TARGET PRICE: RS.89 FY12E P/E: 9.6X
1QFY12 Result update - Disappointment becoming a habit
q Escorts 1QFY12 results once again disappointed with revenues, EBITDA
margin and net profit coming below expectations.
q Revenues during the quarter remained flat YoY, whereas EBITDA
dropped by 21% YoY. Loss in railway equipment division led to drop in
EBITDA margin from 4.1% to 3.2%. Accordingly, PAT was lower by 57%
over 1QFY11.
q Company's performance for the past few quarters had been disappointing
but we were expecting improvement given strong growth in tractor
demand.
q However, tractor demand has started to slowdown and we expect that
to impact the company's earnings in FY12. Further, lower order off-take
from the railway equipment division has led to loss in 1QFY12 from this
division. Company's construction equipment business too has posted net
loss due to lower margins and rise in interest cost.
q On the back of reasons mentioned above, we are lowering our revenue
estimates by 8.7% primarily due to lowering of tractor volume estimates.
We are pruning down our EBITDA margin estimates from 5% to 3.5% to
factor in weak tractor demand scenario and losses from the railway
equipment division and construction equipment business. Based on
above measures, our revised FY12 net profit estimates stands lower by
41%.
q Due to downward revision in our earnings estimate we are cutting down
our DCF based price target to Rs89 (from Rs157). At our revised target
price of Rs89, the stock will trade at a PE of 10.9x, price/sales of 0.2x and
price/book of 0.5x. We downgrade the stock from BUY to ACCUMULATE.
1QFY12 result update (Standalone)
n Escorts 1QFY12 results came in below expectations. Revenues for the quarter
stood at Rs8,231mn as against our expectation of Rs.8569 mn. Lower than expected
tractor sales during the quarter led to shortfall in revenues. Revenues remained
flat YoY.
n Agri machinery group (AMG) revenues stood at Rs7,728mn as against
Rs7,730mn reported during 1QFY11. Tractor volumes during the period stood at
16,606 units against 16,333 units sold in 1QFY11. Realization during the same
period saw a marginal dip due to product mix.
n EBIT margins from the AMG segment dropped from 6.2% in 1QFY11 to 5.8% in
1QFY12 but an improvement over 4QFY11 margin of 5.5%. However the margin
remains well below the 10% average reported in FY10.
n Railway equipment division (RED) revenues were a major disappointment during
the quarter and prime reason for poor 1QFY12 performance. Revenues during
the quarter from this division fell from Rs423mn in 1QFY11 and Rs552mn in
4QFY11 to Rs303mn in 1QFY12.
n Lower order off-take from the railways led to drop in revenues. Lower revenues
led to in efficient utilization of fixed overheads and accordingly the company reported
losses from this segment. This has been one of the high margin segment
for the company and loss in this segment has impacted the overall performance
of this quarter. EBIT margin fell from 19.5% in 4QFY11 to negative 2.1% in the
quarter under consideration.
n Revenues in the auto ancillary business grew by 25% YoY to Rs311mn. However
the company continues to report losses from this segment. During the quarter,
Escorts reported a negative EBIT of 16% from this segment.
n On the back of poor show from railway equipment segment, the company reported
21% drop in EBITDA that came down from Rs339mn to Rs267mn. Sequentially
EBITDA was lower by 11%.
n EBITDA margin for the quarter came in at 3.2% as against margins of 4.1% in
1QFY11 and 3.9% in 4QFY11.
n Increase in raw material cost (steel and rubber) during the quarter too negatively
impacted the margins for the company.
n Employee cost increased by 20% QoQ on account of annual increments in
wages and salaries.
n Other expenses though saw a reduction in 1QFY12.
n Increased usage of working capital limits and higher interest cost led to sharp rise
interest cost from Rs37mn in 1QFY11 to Rs114mn in 1QFY12.
n Exceptional item of Rs18mn mainly pertained to write-off of provision for doubtful
debts. Debt write-off led to tax write-back of Rs5mn during the quarter.
n PAT for the quarter stood at Rs109mn that was much lower than our expectation
of Rs265mn. PAT came in 57% lower YoY.
Escorts construction equipment - 1QFY12 performance review
n Sales in this 100% subsidiary of Escorts grew by 26% YoY to Rs2,090mn.
n However EBITDA margin over the same period dropped from 3.6% to 1.9%.
Decline in margins happened due to increase in commodity prices and mandatory
switching over from BS II to BS III engines.
n Further 49% rise in interest cost led to net loss of Rs14.2mn for the quarter as
against profit of Rs10.8mn in 1QFY11. 4QFY11 profit from this segment stood at
Rs44.2mn.
Initiatives planned by the company to improve performance
n In the tractor segment, company has already taken a 1.5%+ price increase in
January 2012 in line with competitors to deal with rise in material cost.
n INR appreciation could be positive for raw material. Further rubber prices too
have softened and the same should work positively for the margins.
n Company is in advanced field testing stage for the new 50HP tractor designed
specifically for black cotton soil areas of Karnataka and Andhra Pradesh.
n Further initiatives for the tractor business includes 1.New dealer appointment in
unrepresented territories that accounts for 8% of total industry 2.Rationalization
and strengthening of dealer network 3.Tie-up with leading manufacturers of
farm implements in order to push for rotary tillers.
n In the auto suspension segment, the company is banking on price increases from
the customers and cost control for margin improvement. Further the company is
also working on new better margin products for the domestic and export markets.
Company has added new customers like Suzuki Motorcycle and Piaggio for
their new motorcycle and scooter models respectively.
n For the railway equipment division, the company claims that the order book for
2QFY12 is better than 1QFY12 and thus expect their performance to improve
going ahead. Further, in line with railways expansion requirements the company
has inked collaborations with DAKO (Czechoslovakia) for manufacture of disc
brakes, Ingeteam (Spain) for traction systems and Honeywell (USA) for brake
blocks over the last few months. Company is also ready with some new product
for the Indian railway which is expected to translate into orders going forward.
n Escorts construction equipment future sales growth initiatives include 1.Looking
at African markets and 2.Expanding its distribution base from 110 to 145 locations.
Change in estimates
n We are significantly lowering our FY12 estimates on account of three prime reasons.
n Firstly, tractor industry demand has started to weaken and the same will impact
the company's FY12 earnings as 75% of the consolidated revenues come from
this segment. Slowing tractor volumes will also have negative impact on the
operating margins.
February 6, 2012
n Secondly, detoriating performance of the railway equipment division. Lower order
off-take led to net loss from this segment during the quarter. Poor performance
from this segment will have negative bearing on the overall operating
performance of Escorts for this being a high margin business for the company.
n Thirdly, Escorts construction equipment business too faced margin pressure during
the quarter leading to net loss for the quarter which otherwise had been a
profitable venture for the company.
n Out of the four segments, the company operates into; it posted net loss in three
of them. Further the only profitable tractor segment is showing signs of weakness.
n Based on the above mentioned reasons, we have cut our FY12 revenue estimates
by 8.7%, lowered our EBITDA margin estimates from 5% to 3.6% leading
to 41% lowering of our consolidated net profits.
n Due to downward revision in our earnings estimate we are cutting down our DCF
based price target to Rs89 (from Rs157).
n At our revised target price of Rs89, the stock will trade at a PE of 10.9x, price/
sales of 0.2x and price/book of 0.5x.
n We downgrade the stock from BUY to ACCUMULATE.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
ESCORTS LTD
RECOMMENDATION: ACCUMULATE
TARGET PRICE: RS.89 FY12E P/E: 9.6X
1QFY12 Result update - Disappointment becoming a habit
q Escorts 1QFY12 results once again disappointed with revenues, EBITDA
margin and net profit coming below expectations.
q Revenues during the quarter remained flat YoY, whereas EBITDA
dropped by 21% YoY. Loss in railway equipment division led to drop in
EBITDA margin from 4.1% to 3.2%. Accordingly, PAT was lower by 57%
over 1QFY11.
q Company's performance for the past few quarters had been disappointing
but we were expecting improvement given strong growth in tractor
demand.
q However, tractor demand has started to slowdown and we expect that
to impact the company's earnings in FY12. Further, lower order off-take
from the railway equipment division has led to loss in 1QFY12 from this
division. Company's construction equipment business too has posted net
loss due to lower margins and rise in interest cost.
q On the back of reasons mentioned above, we are lowering our revenue
estimates by 8.7% primarily due to lowering of tractor volume estimates.
We are pruning down our EBITDA margin estimates from 5% to 3.5% to
factor in weak tractor demand scenario and losses from the railway
equipment division and construction equipment business. Based on
above measures, our revised FY12 net profit estimates stands lower by
41%.
q Due to downward revision in our earnings estimate we are cutting down
our DCF based price target to Rs89 (from Rs157). At our revised target
price of Rs89, the stock will trade at a PE of 10.9x, price/sales of 0.2x and
price/book of 0.5x. We downgrade the stock from BUY to ACCUMULATE.
1QFY12 result update (Standalone)
n Escorts 1QFY12 results came in below expectations. Revenues for the quarter
stood at Rs8,231mn as against our expectation of Rs.8569 mn. Lower than expected
tractor sales during the quarter led to shortfall in revenues. Revenues remained
flat YoY.
n Agri machinery group (AMG) revenues stood at Rs7,728mn as against
Rs7,730mn reported during 1QFY11. Tractor volumes during the period stood at
16,606 units against 16,333 units sold in 1QFY11. Realization during the same
period saw a marginal dip due to product mix.
n EBIT margins from the AMG segment dropped from 6.2% in 1QFY11 to 5.8% in
1QFY12 but an improvement over 4QFY11 margin of 5.5%. However the margin
remains well below the 10% average reported in FY10.
n Railway equipment division (RED) revenues were a major disappointment during
the quarter and prime reason for poor 1QFY12 performance. Revenues during
the quarter from this division fell from Rs423mn in 1QFY11 and Rs552mn in
4QFY11 to Rs303mn in 1QFY12.
n Lower order off-take from the railways led to drop in revenues. Lower revenues
led to in efficient utilization of fixed overheads and accordingly the company reported
losses from this segment. This has been one of the high margin segment
for the company and loss in this segment has impacted the overall performance
of this quarter. EBIT margin fell from 19.5% in 4QFY11 to negative 2.1% in the
quarter under consideration.
n Revenues in the auto ancillary business grew by 25% YoY to Rs311mn. However
the company continues to report losses from this segment. During the quarter,
Escorts reported a negative EBIT of 16% from this segment.
n On the back of poor show from railway equipment segment, the company reported
21% drop in EBITDA that came down from Rs339mn to Rs267mn. Sequentially
EBITDA was lower by 11%.
n EBITDA margin for the quarter came in at 3.2% as against margins of 4.1% in
1QFY11 and 3.9% in 4QFY11.
n Increase in raw material cost (steel and rubber) during the quarter too negatively
impacted the margins for the company.
n Employee cost increased by 20% QoQ on account of annual increments in
wages and salaries.
n Other expenses though saw a reduction in 1QFY12.
n Increased usage of working capital limits and higher interest cost led to sharp rise
interest cost from Rs37mn in 1QFY11 to Rs114mn in 1QFY12.
n Exceptional item of Rs18mn mainly pertained to write-off of provision for doubtful
debts. Debt write-off led to tax write-back of Rs5mn during the quarter.
n PAT for the quarter stood at Rs109mn that was much lower than our expectation
of Rs265mn. PAT came in 57% lower YoY.
Escorts construction equipment - 1QFY12 performance review
n Sales in this 100% subsidiary of Escorts grew by 26% YoY to Rs2,090mn.
n However EBITDA margin over the same period dropped from 3.6% to 1.9%.
Decline in margins happened due to increase in commodity prices and mandatory
switching over from BS II to BS III engines.
n Further 49% rise in interest cost led to net loss of Rs14.2mn for the quarter as
against profit of Rs10.8mn in 1QFY11. 4QFY11 profit from this segment stood at
Rs44.2mn.
Initiatives planned by the company to improve performance
n In the tractor segment, company has already taken a 1.5%+ price increase in
January 2012 in line with competitors to deal with rise in material cost.
n INR appreciation could be positive for raw material. Further rubber prices too
have softened and the same should work positively for the margins.
n Company is in advanced field testing stage for the new 50HP tractor designed
specifically for black cotton soil areas of Karnataka and Andhra Pradesh.
n Further initiatives for the tractor business includes 1.New dealer appointment in
unrepresented territories that accounts for 8% of total industry 2.Rationalization
and strengthening of dealer network 3.Tie-up with leading manufacturers of
farm implements in order to push for rotary tillers.
n In the auto suspension segment, the company is banking on price increases from
the customers and cost control for margin improvement. Further the company is
also working on new better margin products for the domestic and export markets.
Company has added new customers like Suzuki Motorcycle and Piaggio for
their new motorcycle and scooter models respectively.
n For the railway equipment division, the company claims that the order book for
2QFY12 is better than 1QFY12 and thus expect their performance to improve
going ahead. Further, in line with railways expansion requirements the company
has inked collaborations with DAKO (Czechoslovakia) for manufacture of disc
brakes, Ingeteam (Spain) for traction systems and Honeywell (USA) for brake
blocks over the last few months. Company is also ready with some new product
for the Indian railway which is expected to translate into orders going forward.
n Escorts construction equipment future sales growth initiatives include 1.Looking
at African markets and 2.Expanding its distribution base from 110 to 145 locations.
Change in estimates
n We are significantly lowering our FY12 estimates on account of three prime reasons.
n Firstly, tractor industry demand has started to weaken and the same will impact
the company's FY12 earnings as 75% of the consolidated revenues come from
this segment. Slowing tractor volumes will also have negative impact on the
operating margins.
February 6, 2012
n Secondly, detoriating performance of the railway equipment division. Lower order
off-take led to net loss from this segment during the quarter. Poor performance
from this segment will have negative bearing on the overall operating
performance of Escorts for this being a high margin business for the company.
n Thirdly, Escorts construction equipment business too faced margin pressure during
the quarter leading to net loss for the quarter which otherwise had been a
profitable venture for the company.
n Out of the four segments, the company operates into; it posted net loss in three
of them. Further the only profitable tractor segment is showing signs of weakness.
n Based on the above mentioned reasons, we have cut our FY12 revenue estimates
by 8.7%, lowered our EBITDA margin estimates from 5% to 3.6% leading
to 41% lowering of our consolidated net profits.
n Due to downward revision in our earnings estimate we are cutting down our DCF
based price target to Rs89 (from Rs157).
n At our revised target price of Rs89, the stock will trade at a PE of 10.9x, price/
sales of 0.2x and price/book of 0.5x.
n We downgrade the stock from BUY to ACCUMULATE.
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