MOSL: ESCORTS (Neutral)-A better-than-expected quarter, EBITDA margin hits multi-quarter high

Escorts: A better-than-expected quarter, EBITDA margin hits multi-quarter high

(ESC IN, Mkt Cap USD1.6b, CMP INR907, TP INR988, 9% Upside, Neutral)

• Performance exceeds expectations: ESC's revenue increased 29.9% YoY (+5.2% QoQ) to INR15.1b (est. of INR14.2b). Tractor, construction equipment and railway businesses grew strongly by 25%, 50% and 35%, respectively, led by healthy volume growth. Tractor segment realization grew 3.5% QoQ (-10.4% YoY) to INR480.6k (est. of INR467.7k), largely led by price hikes. EBITDA margin expanded 390bp YoY (+20bp QoQ) to touch a multi-quarter high of 12.3% (est. of 11.9%), as the impact of higher RM cost (+20bp QoQ) and staff cost (+40bp QoQ due to one-off expense related to pension liabilities) was offset by lower other expense (-80bp QoQ). Other income stood at INR170m as against our estimate of INR210m. Consequently, adj. PAT grew 91% YoY to INR1.2b (est. of INR1.1b).
• Earnings call highlights: (a) Domestic tractor industry to grow at 12-15% (v/s 9-11% earlier) in FY19, and ESC to outperform led by new product launches. (b) Tractor market share for 1QFY19 was at 10.7% (+100bp), with 15.3% share in strong market and 5.7% share in opportunity market. (c) Expect growth of ~16-18% in CE business and ~18-20% in railway business. (d) RM inflation impact of 2.5% in 1QFY19 passed on, with ~0.8% price hike in Apr-18 and balance in July-18. (e) Total debt declined to INR0.4b (v/s INR0.5b in Mar-18). (f) Expect tractors/CE/ railways business margins to be ~14%/~5%/~18%.