Geojit Financial
Escorts (Accumulate)
CMP: ₹624.25
Target: ₹695
Escorts is the third largest Agricultural tractor manufacturer in India. It has a strong presence in the north and west market, with an overall market share of 11.9 per cent as on FY19.
Excess monsoon and high reservoir level will be the driving factors for pick up in tractor sale for H2FY20. Additionally, the government subsidies in Telangana, Assam and Maharashtra will further boost demand.
We believe that the Centre’s action towards increase in rural income and consumption will be the prime factor in the Budget FY21.
EBITDA margin for Q2FY20 contracted by 170 bps due to high operating cost and lower product mix. However, adjusted PAT (profit after tax) grew by 11 per cent year-on-year owing to exceptional income and reduction in tax.
We marginally improve our tractor volume growth for FY20 from -8 per cent to -6 per cent and expect pick up in H1FY21, factoring 6 per cent for FY21.
We expect the volume and margin to remain under pressure. However, in view of early cyclical reversal, we rollover our valuation to FY22 and value EL at 14x FY22E EPS and upgrade our rating from ‘Reduce’ to ‘Accumulate’.