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ESCORTS LTD
RECOMMENDATION: BUY
TARGET PRICE: RS.204 FY12E P/E: 7.3X
q Escorts 2QFY11 results were a mixed bag. Revenues were ahead of our
expectation but margins remained lower then our estimates leading to
in-line PBT.
q During the quarter the company wrote off bad debts to the tune of
Rs.1,157 mn for which the provision was made in earlier year. As a result
the company reversed the tax provision made in the past.
q While tractor volumes have remained strong, operating margins on the
same has been below expectations. On the positive side the company
has shown margin improvement in the railway equipment business and
the loss from the auto ancillary business has also come down over
1QFY11.
q Company has shown sequential improvement in margins and we expect
the trend to continue into 3QFY11 as well.
q We are changing our estimates to factor in the company's 1HFY11 performance.
While we are increasing our revenue estimates for FY11 and
FY12, we are curtailing down the operating margin expectation. Consequently
our adjusted net profit estimates not stands at Rs.1,286 mn for
FY11 (earlier Rs.1,325 mn) and Rs.1,655 mn for FY12 (earlier Rs.1,634 mn).
q We continue to maintain our DCF based price target of Rs.204 and rate
the stock as BUY.
n Escorts reported net sales of Rs.8,898 mn, a 32.5% jump over 2QFY10 sales of
Rs.6,717 mn and ahead of our estimates of Rs.8,023 mn.
n Revenues from the agri-machinery segment increased by 38% on back of 21%
jump in volumes, 10% better realizations and execution of some part of the
Tanzanian order. On QoQ basis agri-revenues improved despite lower revenues
from Tanzanian order (Rs.255 mn in 2QFY11 versus Rs.644 mn in 1QFY11). Sequentially
volumes grew by 8% and adjusted realization improved by 2.5%. Escorts
took a blended hike of Rs.16,000 in March 2011.
n Auto ancillary business too reported 19.9% YoY growth and 51.4% QoQ increase
in revenues to Rs.378 mn. During 2QFY11, the company got a price hike
from the OEM's and also increased their product prices in the replacement market.
Additionally volume supply to the OEM's increased for the company over
1QFY11.
n On the railway equipment side, revenues fell marginally by 1.6% YoY to Rs.510
mn. However QoQ revenues were up by 20%.
n Rising input cost led to sharp YoY fall in the company's EBITDA margin from
9.3% in 2QFY11 to 5.1% for the quarter under review. During the same period,
raw material cost as a % of sales increased from 66.9% to 71.7%.
n Sequentially we saw an improvement in EBITDA margin from 4.1% to 5.1% on
following counts - 1. Lower revenues from the Tanzanian order 2.Price hike
taken in March 2011 3.Improved performance from the auto ancillary and railway
equipment division.
n During the quarter the company launched a new tractor series and the same led
to 34% YoY and 9.2% QoQ hike in other expenses.
n Interest cost increased during the quarter but the management expects the same
to come down during 2HFY11 due to repayment of borrowings.
n Due to sharp dip in margin, PBT for the quarter was down by 22.5% YoY to
Rs.401 mn.
n During the quarter the company wrote-off bad and doubtful debt amounting to
Rs.1,157 mn for which the provisions were made in the earlier year. As a result,
the company reversed the tax provision made in earlier year related to this event
and accordingly made an effective tax write back to the tune of Rs331mn.
Thereby net profit of Rs.732 mn during the quarter is inflated to that extent and
becomes incomparable.
Concall Highlights
n Management remains upbeat on the tractor volumes growth rate and do not see
any major impact of rising interest cost on their volumes.
n Company will be lauching a new models under the 'Powertrac' brand in Gujurat,
Maharashtra and Rajasthan during May 2011.
n Management said that they have increased their market share in southern India
market by 2.6% and expects to further improve their market share in that region.
n Escorts construction equipment segment has done revenues of ~Rs.3800 mn and
PAT margin of 3.4% during 1HFY11.
n On the auto ancillary business the management maintain their aim of breakingeven
by 4QFY11.
n Company will be investing close to Rs.1600 mn over FY11-FY13 towards capex
and the same will include debottlenecking, capacity expansion and towards R&D
expenses.
n Company will be repaying ~Rs.300-400 mn during 2HFY11 and thereby bring
down their interest outgo.
Outlook and Valuation
n We expect the tractor volumes will remain healthy on account of 1.Prediction of
normal monsoons 2.Shortage of farm labor 3.Government focus on increasing
agricultural output/productivity in order to contain inflation.
n We expect the company margins will continue to show an improvement in
3QFY11 on following counts - 1.Full effect of price hikes taken by the company
in March 2011will be visible in 3QFY11. 2.Company is launching products in the
higher HP segment and that will help them improve their product mix . 3. Moderation
witnessed in commodity prices over the past few days.
n Interest is also expected to come down from Rs100mn in 1HFY11 to Rs.50 mn in
2HFY11 and that will add to the profitability.
n During 1HFY11, escorts revenue performance has been ahead of our expectation
but margins below expectations. We are therefore increasing our revenues estimates
by 10% for FY11 and FY12 and lowering our EBITDA margins estimates
by 90bps and 50bps for FY11 and FY12 respectively. Our revised net profit estimates
now stands at Rs.1,286 mn (lower by 2.9%) for FY11 and Rs.1,655 mn
(higher by 1.3%) for FY12.
n We continue to maintain our DCF based price target of Rs.204 and rate the stock
as BUY.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
ESCORTS LTD
RECOMMENDATION: BUY
TARGET PRICE: RS.204 FY12E P/E: 7.3X
q Escorts 2QFY11 results were a mixed bag. Revenues were ahead of our
expectation but margins remained lower then our estimates leading to
in-line PBT.
q During the quarter the company wrote off bad debts to the tune of
Rs.1,157 mn for which the provision was made in earlier year. As a result
the company reversed the tax provision made in the past.
q While tractor volumes have remained strong, operating margins on the
same has been below expectations. On the positive side the company
has shown margin improvement in the railway equipment business and
the loss from the auto ancillary business has also come down over
1QFY11.
q Company has shown sequential improvement in margins and we expect
the trend to continue into 3QFY11 as well.
q We are changing our estimates to factor in the company's 1HFY11 performance.
While we are increasing our revenue estimates for FY11 and
FY12, we are curtailing down the operating margin expectation. Consequently
our adjusted net profit estimates not stands at Rs.1,286 mn for
FY11 (earlier Rs.1,325 mn) and Rs.1,655 mn for FY12 (earlier Rs.1,634 mn).
q We continue to maintain our DCF based price target of Rs.204 and rate
the stock as BUY.
n Escorts reported net sales of Rs.8,898 mn, a 32.5% jump over 2QFY10 sales of
Rs.6,717 mn and ahead of our estimates of Rs.8,023 mn.
n Revenues from the agri-machinery segment increased by 38% on back of 21%
jump in volumes, 10% better realizations and execution of some part of the
Tanzanian order. On QoQ basis agri-revenues improved despite lower revenues
from Tanzanian order (Rs.255 mn in 2QFY11 versus Rs.644 mn in 1QFY11). Sequentially
volumes grew by 8% and adjusted realization improved by 2.5%. Escorts
took a blended hike of Rs.16,000 in March 2011.
n Auto ancillary business too reported 19.9% YoY growth and 51.4% QoQ increase
in revenues to Rs.378 mn. During 2QFY11, the company got a price hike
from the OEM's and also increased their product prices in the replacement market.
Additionally volume supply to the OEM's increased for the company over
1QFY11.
n On the railway equipment side, revenues fell marginally by 1.6% YoY to Rs.510
mn. However QoQ revenues were up by 20%.
n Rising input cost led to sharp YoY fall in the company's EBITDA margin from
9.3% in 2QFY11 to 5.1% for the quarter under review. During the same period,
raw material cost as a % of sales increased from 66.9% to 71.7%.
n Sequentially we saw an improvement in EBITDA margin from 4.1% to 5.1% on
following counts - 1. Lower revenues from the Tanzanian order 2.Price hike
taken in March 2011 3.Improved performance from the auto ancillary and railway
equipment division.
n During the quarter the company launched a new tractor series and the same led
to 34% YoY and 9.2% QoQ hike in other expenses.
n Interest cost increased during the quarter but the management expects the same
to come down during 2HFY11 due to repayment of borrowings.
n Due to sharp dip in margin, PBT for the quarter was down by 22.5% YoY to
Rs.401 mn.
n During the quarter the company wrote-off bad and doubtful debt amounting to
Rs.1,157 mn for which the provisions were made in the earlier year. As a result,
the company reversed the tax provision made in earlier year related to this event
and accordingly made an effective tax write back to the tune of Rs331mn.
Thereby net profit of Rs.732 mn during the quarter is inflated to that extent and
becomes incomparable.
Concall Highlights
n Management remains upbeat on the tractor volumes growth rate and do not see
any major impact of rising interest cost on their volumes.
n Company will be lauching a new models under the 'Powertrac' brand in Gujurat,
Maharashtra and Rajasthan during May 2011.
n Management said that they have increased their market share in southern India
market by 2.6% and expects to further improve their market share in that region.
n Escorts construction equipment segment has done revenues of ~Rs.3800 mn and
PAT margin of 3.4% during 1HFY11.
n On the auto ancillary business the management maintain their aim of breakingeven
by 4QFY11.
n Company will be investing close to Rs.1600 mn over FY11-FY13 towards capex
and the same will include debottlenecking, capacity expansion and towards R&D
expenses.
n Company will be repaying ~Rs.300-400 mn during 2HFY11 and thereby bring
down their interest outgo.
Outlook and Valuation
n We expect the tractor volumes will remain healthy on account of 1.Prediction of
normal monsoons 2.Shortage of farm labor 3.Government focus on increasing
agricultural output/productivity in order to contain inflation.
n We expect the company margins will continue to show an improvement in
3QFY11 on following counts - 1.Full effect of price hikes taken by the company
in March 2011will be visible in 3QFY11. 2.Company is launching products in the
higher HP segment and that will help them improve their product mix . 3. Moderation
witnessed in commodity prices over the past few days.
n Interest is also expected to come down from Rs100mn in 1HFY11 to Rs.50 mn in
2HFY11 and that will add to the profitability.
n During 1HFY11, escorts revenue performance has been ahead of our expectation
but margins below expectations. We are therefore increasing our revenues estimates
by 10% for FY11 and FY12 and lowering our EBITDA margins estimates
by 90bps and 50bps for FY11 and FY12 respectively. Our revised net profit estimates
now stands at Rs.1,286 mn (lower by 2.9%) for FY11 and Rs.1,655 mn
(higher by 1.3%) for FY12.
n We continue to maintain our DCF based price target of Rs.204 and rate the stock
as BUY.
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