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Escorts Ltd Q5FY13 results update

January 30, 2014, Thursday, 06:11 GMT | 01:11 EST | 10:41 IST | 13:11 SGT
Contributed by Nirmal Bang


Escorts reported results below expectations. Sales came in line but higher loss in auto ancillary and decline in tractor business margins impacted overall EBITDA margin. Construction equipment segment witnessed marginal improvement in the current quarter led by price hike.
 
Going forward we believe that outlook for tractor industry remains favorable on the back of good monsoon. Agri equipment contributes to nearly 83% of sales of the company. Moreover, with some improvement in the economic conditions, the company’s construction equipment business (11% of sales) will also witness improvement. However, auto ancillary business is expected to remain subdued in the wake of weak environment. Escorts is looking for a strategic partner for revival of its segment.
 
- Revenue increased 12.8% YoY & 22.8% QoQ in Q5FY13 driven by 11.3% YoY increase in tractor volume. Escorts was impacted by decline in revenues from auto ancillary business.
 
- EBITDA margins were lower than our estimate due to lower gross margins and loss in auto ancillary business. Sharp inventory correction during the quarter led to subdued margins in the agri equipment segment.
 
- EBITDA margins stood at 6.1% (vs 5.2% in Q1FY13 and 6.8% in Q4FY13).
 
- Interest cost declined 27.6% YoY & 15% QoQ due to lower debt.
 
- Tax rate was higher at 19.8% as against 9.6% in Q4FY13.
 
- Revenue from railways witnessed 20.2% YoY growth as the company executed its order book of Rs 34 cr. The current order book stands at 38 cr indicating flattish revenues in coming quarter.
 
- Auto Ancillary segment continued to remain under pressue reflecting overall slowdown in auto industry and higher fixed costs.
 
- Escorts took price hike in the construction equipment segment in Oct which led to marginal improvement in margins.
 
- Management expects volume growth to be 14% for FY14E.
 
- Management is targeting to increase its market share in the 50 HP and above segment as well as the South and West markets which will lead to improvement in margins going forward.
 
- Escorts launched its new range of Europe line and Heritage Series tractors in Germany in Nov 13 to increase its presence in the overseas markets.
 
Escort’s strategy to focus on higher HP tractors and increase presence in Southern markets will lead to higher growth and thereby improvement in margins. We expect Escorts to witness CAGR growth of 30.1% in EBITDA and 70.6% in PAT over FY12-FY15E leading to an improvement in its RoE from 4.3% in FY12 to 11.7% in FY15E and RoCE from 6.1% in FY12 to 11.1% in FY15E. We continue to remain positive on the stock and maintain our BUY rating with a target price of Rs 156 (8.0x FY15E EPS) indicating an upside of 26.9% from current levels. At CMP, Escorts trades at 8.7x and 6.3x its FY14E and FY15E EPS; 0.35x on EV/Sales of FY14E sales and EV/EBITDA of 7.43x its FY14E EBITDA.