Sustaining post-festival sales growth key for Escorts

Margins in Q2 were affected by lower volumes and inferior product mix

Improvement in tractor demand in the second half of the current financial year is expected to help reverse the declining trend of sector sales. The Escorts management in an earnings call highlighted that volumes have seen an uptick in the festive season which could sustain in the near term. For October, the company reported a 2 per cent increase in tractor sales, driven by the domestic segment, which reported volumes of 13,000 units.

While sector volumes for the first half of FY20 were 15 per cent lower, the company indicated that for FY20 sales fall would be restricted to single digits. Adequate rainfall, an expectation of good rabi crop, higher minimum support prices are expected to keep the sales momentum strong. After higher levels of discounting i n t he June quarter, an uptick in sales has helped stabilise prices of tractors.

Growth i n volumes should help the company improve its profitability, which was impacted in the September quarter. Margins fell 170 basis points to 9.6 per cent, both on account of lower operating leverage, as well as inferior product mix. The company sold a higher share of less profitable tractors (lower horsepower units) as compared to the year-ago quarter. While the company gained market share in the quarter to 11.2 per cent, sustaining it would require it to improve its position in regions such as South India where its share is much lower. The company is banking on new product launches and expansion of its distribution network to improve volumes and share.

While the key trigger for the stock would be led by the tractor segment, which accounts for three-quarters of revenues, sales growth for the construction equipment and railway products division would have an impact on overall revenues and margins. While volumes and revenues in the construction segment fell 21 per cent and 19 per cent, respectively, margins at 2.7 per cent were higher on lower commodity costs and better product mix. The company expects growth and margins to be in high single digits. In the railway segment, while revenues were higher by about 20 per cent, margins came in lower at 19.1 per cent, given the higher mix of lower-margin new orders. Given the order book of ~500 crore and prospects in the segment, the company expects revenue growth of 1520 per cent. Investors should await a meaningful recovery in volumes before considering the stock.

For October, the company reported a 2 per cent increase in tractor sales