Comments
Reliance Securities
Escorts (Buy)
CMP: ₹597.75
Target: ₹925
We believe favourable monsoons in Escort’s key markets of North and Central zone would support its strong outperformance in tractor industry in 2HFY20. Further, favourable geographical mix, strong marketing and distribution strategy would aid ESC to improve tractor volumes going forward.
We also expect its Railway business to sustain positive traction on the back of increasing order book and rising revenue from new products. EBIDTA margin is expected to expand by 100 bps in FY21 from current level 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 Escort’s 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 likely improvement in tractor segment, better traction from railway business and healthy margin profile, we maintain our positive view on the stock.
Post recent fall, stock’s current valuation of about 9xFY22E appears attractive and we recommend ‘buy’ on Escorts with a target price of ₹925, valuing the stock at 13.5x FY22E EPS.
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