Reliance Securities
Escorts (Buy)
CMP: ₹719.45
Target: ₹1,015
We believe normal monsoons in Escorts’ key markets of North and Central zone would support its strong outperformance in tractor industry in 2HFY19. Further, favourable geographical mix, strong marketing and distribution strategy would aid Escorts to deliver double-digit volume growth, going forward.
We also expect its construction equipment business to sustain positive traction on the back of increasing construction activities. EBIDTA margin is expected to expand by 100 bps over FY18-FY20E led by cost control measures, scale and turnaround in construction equipment segment.
We expect focus on agri implements, railways and construction equipment segments to reduce Escorts’ dependence on tractor business, going forward, which would attract higher than historical average valuation multiple for the stock led by reduction in cyclicality of business.
In view of strong industry performance, better traction from railway business and healthy margin profile, we maintain our positive view on the stock.
Post recent fall, the stock’s current valuation of about 11.4xFY20E appears attractive and we recommend ‘buy’ on Escorts with a target price of ₹1,015, valuing the stock at 16.5x FY20E EPS.