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Recommendations India

Escorts Q1FY15 results update

August 1, 2014, Friday, 07:11 GMT | 02:11 EST | 10:41 IST | 13:11 SGT
Contributed by Nirmal Bang

Escorts reported results below expectations. Poor performance was across all segments. EBITDA margin declined YoY to 5.0%.

- Revenues declined 4.0% YoY in Q1FY15 led by decline in revenues across all segments except construction equipment segment.

- EBITDA margins were lower due to loss in auto ancillary and construction equipment business. Agri eq segment also witnessed decline in margins. We expect margins to be at 5.9% for FY15E and then improve to 7.2% in FY16E.

- Tractor volumes have remained subdued on account of sub normal rains in the northern and central regions and unseasonal rains in some areas. Management expects growth to be subdued in H1FY15E and improve in H2FY15E. For FY15E, management has guided for 3-4% volume growth in the tractor industry. We have factored in 5.5% revenue growth for FY15E.

Despite witnessing subdued margin in Q1FY15, we are positive on the company in the long term considering the various restructuring process taken by the company across all segments to improve margins:

Agri division: We expect agri segment to remain subdued led by lower demand outlook. However; focus on high HP segment, growing exports, increasing presence in western and southern markets and increasing contribution from newly launched products will aid improvement in margins.

Construction Equipment: An improvement in the macro economic conditions will lead to an improvement in the overall segment. Moreover, the company has hired consultant (incurred Rs 2 cr as one off expense) to look into the different line items of the segment and suggest strategy to improve performance. Management is targeting to break even this segment by Jan 2015.

Auto ancillary business: This segment is currently under pressure with losses and management is looking for a strategic partner (to bring in technology) which will lead to some revival of the segment. Moreover, the company has initiated VRS scheme to almost 300 employees out of 550+ employees which will result in cost saving of Rs 10-12 cr.

We believe that the restructuring efforts to save cost & turn other segments profitable will take time and will start yielding results by end of FY15E. We expect Escorts to witness CAGR growth of 21.5% in EBITDA and 23.2% in PAT over FY14- FY16E leading to an improvement in its RoE from 9.3% in FY14 to 11.8% in FY16E and RoCE from 8.4% in FY14 to 11.6% in FY16E. Near term trigger for the stock highly depends on revival in tractor demand and improvement in economic environment for construction equipment. Nevertheless, we are optimistic about the long term prospects of the company as improvement efforts taken by the management will yield results in the long run. We maintain our BUY rating with a target price of Rs 156 (7.5x FY16E EPS) indicating an upside of 32.2% from current levels. At CMP, Escorts trades at 8.6x and 5.7x its FY15E and FY16E EPS; 0.19x and 0.27x on EV/Sales of FY15E and FY16E sales and EV/EBITDA of 3.19x and 4.68x its FY15E and FY16E EBITDA.