Escorts - "BUY" recommendation.:: SPA

Escorts reported net sales of INR 8234 mn, up by 7.1% YoY & down by 18.8% QoQ. EBITDA margins expanded by 240 bps YoY
to 5.65%, on the back of lower operating expenses partly offset by higher employee cost. With monsoon playing a spoilsport,
offtake of tractors de-grew by 14.8% YoY. Railway equipment segment has seen a sharp improvement in margins, whereas
auto ancillaries segment and construction equipment segment continued to remain under pressure. We continue to
retain our "BUY" recommendation.

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Weak monsoon hurts topline
Tractor segment contributed ~75% to revenues in Q4FY12. Revenues
from the segment contracted by 9% YoY & 20.5% QoQ to INR 6293
mn, on the back of fall in tractor volumes by 14.8%. Realizations
improved by 680 bps YoY to INR 485923/unit on the back of
favorable product mix. EBIT margin expanded 153 bps YoY to 6.46%
and remained flat on a sequential basis.
Railway segment - improved margins
Revenues from Railway segment stood at INR 388 mn, down by
29.8% YoY & 1.2% QoQ. EBIT margin expanded by 844 bps YoY &
1782 bps QoQ to 19.9% on account of product mix enrichment. In
railway segment, the company has an order book worth INR 700
mn which is to be executed over the next couple of quarters.
Auto Ancillary - under pressure
Net sales in the auto ancillary segment stood at INR 304 mn, up by
2.1% YoY & down by 27.1% QoQ on the back of sluggish demand
from the CV industry. EBIT margin at -11.4% has continued to be in
the negative territory.
Construction Equipment - declined margins
Net sales from construction equipment segment contracted by
15.99% QoQ to INR 1341 mn due to the overall slowdown in the
industry. EBIT margin contracted by 429 bps QoQ to -5.83%.
Expansion in EBITDA Margin
EBITDA margin expanded by 33 bps QoQ to 5.65% on the back of
improved performance from railway segment partly offset by lower
margins from construction equipment and auto ancillary segment.
PAT margin expanded by 41 bps QoQ to 2.23% led by increased
EBITDA margin.
December 13, 2012 RESULT UPDATE - Q4FY12
New product launches to beat industry growth
The company has recently launched "Powertrac Diesel-Saver plus"
tractor series with a 10% power upgrade across its range, catering
to the emerging 'commerce-minded' segment of the Indian farmers,
who use their tractors not just for regular farm work but also as a
source of generating additional income. This tractor range has
seen strong reception from markets like UP, MP and Bihar. The
company has also launched Executive Tractors in the 60-65 HP
range under Farmtrac brand. The company is aiming to capture a
market share of 25% (currently 10%) in the high HP segment whose
share in the overall tractor industry is expected to increase from
15% to 23% over the next 6-7 years. We expect the high HP segment
to fetch 2-3% higher margin over that of mid and small HP tractors.
Capex Plans to aid growth
The company is planning to incur a capex of ~INR 1700 mn for
technology upgradation and quality improvement across its
segments.
Outlook & Valuation
We expect the tractor industry to register a CAGR of 14% over
FY12-16E. Escorts is well placed with the introduction of its new
products in higher HP tractors segment and commercial tractor
segment. The company's focus on increasing its market share in
higher margin high HP tractor segment will augur well for the
company. We expect the topline & bottomline to register a CAGR
of 20% & 55% over FY12-FY14E on account of its recent initiatives
of launching new products, increasing dealer network, turning
around of construction business and expected rebound of railways
segment. We retain our "BUY" recommendation with a revised
target of INR 92 (98.5) in 18 months at 5x FY14E EV/EBITDA.