Escorts’ re-rating hinges on tractor volume recovery

Firm banking on pent-up demand to reflect in the Jun-oct period

Despite a drop in volumes across key segments, Escorts reported better-than-expected numbers in the March quarter (Q4).

Even as volumes in the tractor segment — which account for three - quarters of revenues — were down 20 per cent over the year-ago period, higher realisations in the segment helped restrict the fall in revenues to 15 per cent.

The volume fall in the construction equipment business, which accounts for 15 per cent of revenues, was a steeper 32 per cent.

The firm indicated that better product mix, operational efficiencies, and lower raw material cost helped improve operating profit by 2.5 per cent and margins to 14.1 per cent, up 245 basis points (bps) over the yearago quarter. Raw material cost-to-sales was down 675 bps to 62 per cent, which, coupled with lower-thanexpected fall in revenues, helped report its highest quarterly margins in the past fifteen years.

While sales in the March to May period had been muted due to the lockdown,

While its plants are operational with about 20% capacity, Escorts expects to scale up the same to 50-60% by June. The firm said it has enough stock to meet demand till June

the firm indicated that pentup demand should help improve t he sales trend from the June- October period. The management estimates that 30-40 per cent of about 80,000 units of lost orders are expected to come back in the peak season, starting May.

While its plants are operational with about 20 per cent capacity, Escorts expects to scale up the same to 50-60 per cent by June. The firm indicated that it has enough stock to meet demand till June.

For the construction equipment business, it expects demand to build up in the second half of the financial year, with the June quarter expected to see a sharp fall in sales.

While the firm lost market share in tractors as its stronger regions in northern and central India saw a higher fall than the overall market, which fell by 9 per cent, its tie -up with Japan’s Kubota would expand its presence in its weak market in south India, as well as boost exports in the premium tractor space.

While the firm is confident about growth coming back, given the expectation of downtrading due to the ongoing slowdown, realisations and margins could be impacted.

However, most analysts are positive on the stock , given the expected recovery in tractors, tie-up with Kubota, and a healthy balance sheet.