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Recommendations India

Escorts Q6FY13 results update

June 3, 2014, Tuesday, 11:02 GMT | 06:02 EST | 14:32 IST | 17:02 SGT
Contributed by Nirmal Bang

Escorts reported results below expectations. Poor performance was across all segments. EBITDA margin declined to lowest in the last 8 quarters and stood at 4.7%. Going forward we expect agri segment to remain subdued led by lower demand outlook. However, with improvement in the macro economic conditions, the company’s construction equipment business (11% of sales) will witness improvement. For the auto ancillary business, which is currently under pressure, management is looking for a strategic partner which will lead to some revival of the segment.

- Revenues declined 1.8% YoY & 15.2% QoQ in Q6FY13 led by 18.3% QoQ decline in tractor volumes. Furthermore, construction equipment continued to witness decline in revenues led by weak demand scenario.

- EBITDA margins were lower than our estimate due to loss in auto ancillary and construction equipment business. Agri equipment segment also witnessed decline in margins.

- In the last one quarter tractor demand has turned weak on the back of unseasonal rains and management has also lowered its growth guidance. Higher discounts have also impacted volumes. Management now expects growth to be subdued in H1FY15E (with negative growth in Q1) and improve in H2FY15E. For FY15E, management has guided for 4% volume growth in the tractor industry. We have factored in 5% growth for FY15E.

- Escorts is focusing on exports and is targeting to increase export units from ~1000 units in FY14 to 2000 units in FY15E and 4000 units by FY16E. Escorts is focusing on regions like South East Asia and Germany as well.

- Despite witnessing subdued margin in FY14, management is hopeful of improving margins on the back of reduction in headcount, increasing presence in the Southern and Western markets, focus on high HP segment and increasing contribution from newly launched products. We expect margins to be at 6.4% for FY15E and then further improve to 7.2% in FY16E.

We expect Escorts to witness CAGR growth of 21.5% in EBITDA and 23.6% in PAT over FY14-FY16E leading to an improvement in its RoE from 9.3% in FY14 to 11.7% in FY16E and RoCE from 8.4% in FY14 to 11.5% in FY16E. We believe that 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 have lowered our FY15E estimates on the back of weak outlook and have introduced FY16E estimates. We maintain our BUY rating with a target price of Rs 156 (7.5x FY16E EPS) indicating an upside of 21.2% from current levels. At CMP, Escorts trades at 8.5x and 6.2x its FY15E and FY16E EPS; 0.3x and 0.24x on EV/Sales of FY15E and FY16E sales and EV/EBITDA of 4.69x and 3.31x its FY15E and FY16E EBITDA.

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