Escorts: Strong second half ahead

Higher demand and product launches should drive volumes & market share

The Escorts stock was down over four per cent intra-day after the company posted muted sales for November. Volumes, which came in at 5,119 units, were up just 6.5 per cent over the year-ago period as against a better show estimated by the Street. Its peer M&M posted a growth of over 30 per cent in the month. Incidentally, the sales of the two companies were the opposite in October with Escorts posting 14 per cent growth while M&M posted an 11 per cent fall for that month.

Analysts at IDFC Securities say growth rates are more on account of the variance in inventory levels with the dealers. Demand is likely to show double-digit growth in the second half of FY18, led by good monsoon, higher kharif crop production and improved minimum selling price for food grains. Most analysts peg tractor growth for FY18 to be in line with the year-to-date sales of the company, which is 15 per cent.

The stock, however, has been weak over the past month, shedding 12 per cent over this period. The September quarter results, especially from the standpoint of revenues, was below estimates, given the goods and services tax (GST) compensation to dealers to the tune of ~26 crore. The margins adjusted for the GST hit, however, came in above estimates at 13.7 per cent. The company is looking at maintaining segment-level margins for the tractor business at around 12-13 per cent. Despite the near-term weakness, analysts believe there are multiple triggers for the company led by launch of new products and increasing market share. Given the new launches in the higher horsepower segment and its existing base, analysts expect the company to improve its market share by about 400 basis points to around 14 per cent from the current 10.5 per cent.

Though 80 per cent of the revenues and almost all its profits comes from tractors, the company’s railways and construction equipment segments, too, are expected to boost overall performance. Analysts at Credit Suisse say the company’s earnings growth over the FY17-20 period is the best among automakers as fast top line growth at railways and margins turnaround in the construction equipment division will support tractors. Its valuation at 12.5 time its FY20 earnings estimates adjusted for treasury shares is also the lowest among auto companies.

While analysts say volume growth will come back over the next couple of months and the demand cycle should be strong, market share gains and stable volume growth is important if the stock were to make further gains. Invest in dips.