Escorts Kubota Ltd. share price target

ICICI Securities Ltd | Retail Equity Research Escorts' Q3FY17 results were above our estimates on topline, margin front but below estimates on bottomline front. Revenues were at | 1093 crore, up 22.6% YoY, 2.2% QoQ, marginally above our estimate of | 1080 crore. Revenue from agri machinery was at | 889 crore (estimate | 889 crore), railway equipment- | 58 crore (estimate: | 58 crore) & construction equipment | 152 crore (estimate | 134 crore) Tractor volumes grew 27.4% YoY to 16963 units while construction...

Background: Escorts Ltd (ESC) is one of India's prominent players in the Automotive / Tractor industry, with an overall market share of ~11% in the domestic tractor industry. ESC is also present in construction and material handling equipment, such as cranes, compactors and forklifts with 55% market share in material handling segment. Revenues share by segment in 2QFY17: Agri machinery (79.4%), Constriction equipment (13.4%), Railway...

Escorts delivered subdued Q2FY17 performance with its operating margin coming way below our as well as streets estimates, impacted by one time charges to some extent. Its EBIDTA margins increased by 309 bps YoY (down 193 bps QoQ) to 6.3% as against our estimate of 7.8%.

Escorts Limited recently interacted with Escorts management. Company is in the process of completing its divestment of major part of its Auto Products business. Its focus is increasing on its core business of Agri Machinery (EAM). It also increases its efforts to expand the most profitable railway business. We believe that company’s recent strategic initiatives in terms of reducing exposure in loss making entities, increasing efforts for expansion of profit making business and more focus on cost rationalization would pay off over next 2-3 years. Escorts’ auto ancillary segment has been bleeding since long, particularly its OEM segment. Management has planned sale of OEM and exports division of the segment initially, while retaining after sales with company for a year’s period. However, over a period, it would completely exit from its auto parts business.

It would sell the plant and machinery while retaining land and building assets for future development. This strategic decision strengthens our positive view on the management’s commitment to enhance the returns by focusing on profitable segment and divesting loss making entities.They maintain our volume and financial estimates for FY17E/FY18E. Accordingly, maintain target price of Rs 415/share, valuing it at 12xFY18E EPS and they reiterate “BUY” on Escorts.

Escorts (ESC) has announced the divestment of major part of its Auto Products segment. Company's auto ancillary segment has been bleeding since long and we believe that it is a right strategic decision to focus on the core business and getting rid of loss making entities. Management has stated sale of OEM and exports division of the segment, while retaining after sales with company, which would be merged with agri business eventually. After sales business is reasonably profitable and adds to the profitability and return ratios of the company. Moreover, company would sell the plant and machinery to Pune based Badve Engineering, however, its land and building assets would be retained by Escorts for future development. This strategic decision strengthens our positive view on the management's commitment to enhance the returns by focusing on profitable segment and divesting loss making entities.

Escorts today announced the deal to divest majority of it Auto product business for an undisclosed amount. We see this deal as a significant positive for the company not only as it improves the profitability but also provides confidence on the company’s intent of resolving issues in various businesses. The next focus area for the top management is expected to be the turnaround of its construction equipment business. Our estimates partially factor in the said turnaround; however it is far lagging the company’s plans for the segment. While the company benefits from the resolution to its dragging business segments, a turnaround in tractor industry fortunes and a strong growth in the railways business will see substantial gains for the company over the next couple of years (60% net profit CAGR over FY16?18). We increase our EPS estimate for FY18 by 5% to factor in the sale of auto business. Phillip Capital increase their target multiple to 12x from 11x earlier given the profit and return ratio improvement post the deal. We retain our Buy rating on the stock with a revised target price of Rs 390 (Rs 310 earlier).

Background: Escorts Ltd (ESC) is one of India's prominent players in the Automotive / Tractor industry, with an overall market share of ~11% in the domestic tractor industry. ESC is also present in construction and material handling equipment, such as cranes, compactors and forklifts with 55% market share in material handling segment. Revenues share by segment in 1QFY17: Agri machinery (82.5%), Constriction equipment (9.5%), Railway equipment...

Escorts delivered strong Q1FY17 performance with its operating margin coming way above our as well as street's estimates. Its EBIDTA margins increased by 236 bps YoY and 353 bps QoQ to 8.3% as against our estimate of 7%, benefitted by lower RM cost and control on other expenses. Its Revenues/EBIDTA/Adj PAT increased 9.4%/52.4%/46.2% YoY and 30.7%/126.2%/69.7% QoQ to Rs10.5bn/Rs878mn/Rs514mn vis--vis our estimate of Rs10.7bn/Rs749mn/Rs524mn in Q1FY17. Its tractor volume grew by 10%YoY and 38.4% QoQ, while construction equipments' volume grew 45.5% YoY and 0.3% QoQ in the quarter. It has booked extra ordinary expense of Rs 63mn towards VRS expenses. Healthy tractor volume, cost cutting initiatives and strong performance of railway equipment segment are the key reasons behind margin expansion and healthy bottom line. Lower non operating income and higher tax rate restricted growth in bottom line to some extent.

Key highlights: Strong quarter led by stellar margin expansion of tractor and railways divisions. We remain positive on the company's prospects and believe it will be a big beneficiaryofarevivalintractorsalesbasedon:(1)tractorindustryrecoverygatheringpace with industry growth expectation of 10%+ (2) focus on noncore markets (3) railways division orderbook at all time high of Rs 1000mn (4) costcutting initiatives bearing fruits. WebelieveEscortswillmorethandoubleitsprofitsbetweenFY1618,ledby12%revenue CAGRand440bpsmarginexpansion.WeincreaseourFY18EPSby10%onconsistentmargin...