MOSL: ESCORTS (Neutral)-EBITDA in-line-tractor industry to grow 5-8% in FY20
Escorts: EBITDA in-line; tractor industry to grow 5-8% in FY20
(ESC IN, Mkt Cap USD1.1b, CMP INR649, TP INR724, 12% Upside, Neutral)
- Tractor margin at seven-quarter low: ESC's revenue grew 14% YoY (+1% QoQ) to INR16.3b (in-line) in 4QFY19. Tractor, Construction Equipment (CE) and Railway businesses grew by 12.5%, 10% and 36% YoY, respectively. Tractor realization declined 2.5% QoQ (+5.5% YoY) to INR490k (our estimate: INR497k) due to a weak product mix relative to 3QFY19. EBITDA margin of 11.6% was in line with our estimate of 11.8%, as the benefit of lower RM cost (-80bp QoQ to 68.8% of sales) was offset by higher other expense (+120bp QoQ to 12.3%). Tractor segment margin shrank 200bp YoY (-120bp QoQ) to 13.1%, led by weak product mix. Lower other income of INR173m (our estimate: INR214m) restricted adj. PAT growth to 7.8% YoY (INR1.2b v/s our estimate of INR1.3b). For FY19, revenue/EBITDA/PAT grew 13.6%/9%/8% YoY.
- Earnings call highlights: (a) Domestic tractor industry is expected to grow at 5-8% in FY20. (b) Market share expanded by 110bp to 11.8% in FY19 and by 190bp to 15% in 4QFY19. (c) ESC expects to correct the inventory level from ~4 weeks to ~3-3.5 weeks by June. (d) Financing availability is not a constraint yet. (e) FY20 capex guided at INR2.5-3b. (f) CE and Railway businesses to grow 10-12% and 15-18%, respectively, in FY20. (g) The price increase of ~4-5% in CE covers entire RM inflation. (h) Increased variable consulting fee and inventory provisioning expense of INR160-170m (for inventory >365 days) impacted margins.
Escorts is a holding company. Through its subsidiaries, Co. is engaged in the manufacture and sale of agricultural machines such as tractors, engines, round and flat tubes, double acting hydraulic shock absorbers for railway coaches, center buffer couplers, automobile shock absorbers, telescopic fronts and Mcpherson struts, brake blocks and all types of brakes used by railways. Co. also manufactures equipment for material handling and road construction. In addition, Co. is engaged in the provision of healthcare services and facilities, cellular telecommunications services, software development, provision of internet service, and other e-commerce, financial and investment services.
Motilal Oswal Financial Services Ltd. is a reputed name in Financial Services and Online Trading with group companies providing services such as Private Wealth Management, Retail Broking and Distribution, Institutional Broking, Asset Management, Investment Banking, Private Equity, Commodity Broking, Currency Broking, Principal Strategies & Home Finance.
Motilal Oswal Securities is a group company of Motilal Oswal Financial Service Limited which started as a stock trading company and has blossomed into well diversified firm offering a range of financial products and services. Motilal Oswal has built a reputation as the source for best stock trading company and this has taken a wealth of experience, knowledge and expertise, constantly working in tandem, over the years.
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