Escorts Ltd.

NSE: ESCORTS | BSE: 500495 | ISIN: INE042A01014 |Industry: Commercial Vehicles
|Expensive Star
1402.55 -12.10 (-0.86%)
NSE Nov 23, 2020 15:31 PM
Volume: 940.4K
 

Escorts Ltd.    
20 Oct 2020
1402.55
-0.86%
With agribusiness at 80% of revenue, Escorts benefits from positive sentiment this year

by Suhani Adilabadkar

From the iconic Rajdoot motorcycles to partnering with Kubota, Escorts has come a long way. Escorts in its current avatar is one of India’s foremost tractor manufacturers with 12% market share in the Indian tractor industry, one-third of the global tractor market. The company offers more than 225 variants in the 12 to 75 HP segments in the domestic market under three marquee brands Farmtrac, Powertrac and Steeltrac.

Escorts has three major revenue streams, agri business (mainly tractors, 80% revenues) with its horizons encompassing crop solutions, engines, gensets and lubricants along with construction equipment and railways equipment business.

Quick Takes

  • Escorts started production from the second week of May, functioning for 45 days in the first quarter of FY21.
  • Revenue decline was 24% YoY, and operating profit fell 14% while PAT growth came out in single digits, up 7% YoY in Q1 FY21.
  • MSP set by the government has been higher, rabi output has been robust, excess monsoon, high reservoir levels and record kharif sowing are driving tractor sales to new highs.
  • Recent Kubota deal adding 50,000-tractor capacity and providing easy access to developed markets augurs well for the company.

Harsh Covid Impact, and a June Revival

FY20 witnessed domestic tractor industry volumes declining 10% to 7.09 lakh tractors while exports went down by 18% to approx. 76,000 tractors. Lower mechanisation levels compared to the rest of the world, the performance of the moody monsoons, water reservoir levels, farm loan waivers, governmental direct cash transfer schemes and credit availability are significant variables in the domestic tractor growth equation. Though Mahindra tractors, TAFE, Escorts and Sonalika are the major domestic players, foreign companies such as John Deere, New Holland have set up their base in India since 1998.

Escorts, the third largest player, after dabbling in misadventures like telecom and divesting its auto parts business, has been working to turn around its core tractor business through stringent cost cutting, quality control and revamping its product line. Since, 2016, growth momentum has been sustained, while revenue and PAT CAGR for the past four years stands at 14% and 60% respectively.

Fast forward to Covid times, which has been a big shock to auto demand: operating revenues slid 16% YoY with tractor volumes declining 20%, operating profit growth fell 1.54% while PAT registered 6% YoY growth in March quarter FY20.

Speaking with respect to the Covid impact on the tractor industry, Mr Shenu Aggarwal, CEO, Escorts Agri Machinery said, “Overall in Quarter 4, the industry degrew by 9%, we were hoping that industry will actually grow in Quarter 4 by about 10% or 11%, but at an industry level we lost about 35,000 odd tractors because of the lockdown”.

As the lockdown came into effect before crucial ‘Navrata days’, an auspicious period for buying tractors in north, central and eastern India, Escorts tractor volumes fell. North, central and eastern India account for about 60-70% of Escorts revenues.

The company entered the June quarter with production initiated in the second week of May, functioning for 45 days in first quarter FY21. With this backdrop, 13.8% fall in tractor volumes, but on the whole looks reasonable.

Revenue decline was 24% YoY, operating profit fell 14% while PAT growth came out in single digits, up 7% YoY in Q1 FY21. And June came with a strong rebound, as the tractor industry reported 22.4% YoY growth in domestic volumes. Similar to industry trends, June growth was robust for Escorts reporting 23% YoY jump in domestic volumes in June 2020 after witnessing stagnant growth in May and a precarious 88% fall in month of April.  As per the management, growth was widespread in June except West Bengal and Chhattisgarh, with southern regions reporting roughly 50% growth.

Happy Rain Gods + Pent Up Demand drives Tractor Sales  

Driven by pent up demand and the shift from shared to personal mobility, cars and two wheelers are exhibiting strong growth numbers. So are tractors, and though a pent up demand factor also exists here, there are a host of other factors pushing growth in the Indian tractor industry.

Tractor growth is not just fuel driven - rainwater is also a key factor, as Indian agriculture (contributing 17% to GDP) is still largely rain fed. In addition to the smiling rain gods this year, the government has also created strong positive sentiment around the agriculture sector by passing three important agriculture bills in the recent monsoon session. MSP set by the government has been higher, rabi output has been robust, excess monsoon, high reservoir levels and record kharif sowing are driving tractor sales to new highs.

Coming to the playing field of the Indian tractor industry, though market leader M&M is also exhibiting a strong growth trajectory, its overall numbers are dragged by degrowth of its auto segment which has declined 36% in July, 16% in August and 17% in September 20.

Escorts on the other hand is a pure play on agriculture with its agri business contributing more than 80% of the revenue mix. The recent Kubota deal adding 50,000-tractor capacity and providing easy access to developed markets augurs well for the company. With a robust product line up and debt free status, the business is expected to harvest strong positive sentiment in the Indian rural economy. The stock has gained 125% since 23rd March 2020.

default
Escorts Ltd. has gained 116.44% in the last 1 Year
Recommended
More from Escorts Ltd.