LKP BYTES : Escorts (Buy @ 66 for a 3 month price target of 82)

The story so far ………..

The Rs40bn Escorts is the third largest player in agricultural machinery in India after M&M and TAFE with a market share of 11%. Its Farmtrac & Powertrac brands of higher HP tractors have a strong brand equity in North India.

One would obviously ask the question – Why bother at all to look at a Number – 3 player in a segment like Tractors which is not in the best of health at present and more so Escorts which is presently running a business with an ROE and EBIDTA of 5%.

The story ahead ………..

Promoters increased their holding in Escorts from 28% to 32% during CY’12 and in a strategic move (not in the best interests of minority shareholders) merged group companies into the business of Construction Equipment – CE and Finance into Escorts to shore up their holding in the company to 42% now thereby putting to rest all possible attempts of a take over.

Post this merger, Tractors now form 75% of revenues, CE forms 16% and the balance 9% comes from Railways & Auto Components. The merger now exposes Escorts to the investment cycle in India as it is a key monitorable for the CE business which is presently witnessing challenging times.

Escorts sells ~60,000 tractors annually and we believe that with a steady rise in MSP of crops and improving rural incomes augurs well for the industry going forward. The recent rise in MSP for Rabi crops would in our view boost incomes in North India which is the main stay for the agricultural machinery business of Escorts. We are optimistic on the ability of Escorts to emerge as a Pan India player in Tractors going forward and improve its EBIDTA margins by 100bps annually for the next two years.

Escorts trades at 0.4x book and 11x historical earnings and is a play on the agricultural equipment and construction equipment theme in India. We recommend a BUY on Escorts trading at 9x one-year forward earnings with a 3 month price target of Rs82.

Thanks and Regards

LKP Advisory

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