MOSL: ESCORTS (Neutral)-Tractor cycle uncertain, inventory reduced
ESCORTS: Tractor cycle uncertain, inventory reduced
(ESC IN, Mkt Cap USD0.8b, CMP INR471, TP INR520, 10% Upside, Neutral)
- Operating deleverage hurts margins: Revenue declined ~6% YoY to INR14.2b (our estimate: INR13.9b). Volumes were down by ~14% YoY in Tractors and by ~21% YoY in Construction Equipment (CE). However, Railway revenue grew ~34% YoY. Tractor realizations improved ~6% QoQ (+8% YoY) to ~INR519k, driven by higher spares revenue and ~1% price hike in Apr'19. EBITDA margin of 10% came in below our estimate of 10.6% due to operating deleverage and an adverse mix in Railway. PAT declined ~27% YoY to INR875m (our estimate: INR931m). Tractor PBIT margin shrank ~330bp YoY (-220bp QoQ) to 10.9%.
- Earnings call highlights: (a) ESC's dealer inventory was at 3-3.5 weeks, as it took inventory correction in 1Q. Tractor retails for ESC were much better than wholesales and also industry wholesales. (b) It is yet to see any material recovery in Jul'19. Any earliest sign of recovery would be in Sep'19 with festive season sales. (c) Competitive intensity has not changed dramatically, barring a few exceptions. (d) Volumes in north and central markets declined by ~2% YoY (strong markets for ESC), whereas those in south and west markets (opportunity markets for ESC) were down by 31% YoY due to very low reservoir levels. (e) Railway biz is expected to grow at 15-20% in FY20, whereas CE is likely to recover in 2HFY20 (seasonally stronger). (f) EBITDA margin will likely remain under pressure in FY20 due to operating deleverage and a weaker mix in Railway. (g) It has earmarked capex of INR2.5-3b for ongoing capacity addition (incl. JV), new products and maintenance.
- Valuation view: We cut our FY20/21 EPS by 9%/12% to factor in our lower volume assumptions. With the tractor cycle coming off peak and the cyclicality in CE, current valuations do not capture the risk of the substantial pressure on earnings. The stock trades at 9.8x/9.9x FY20/21E EPS. Neutral.
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.
Unfortunately, this report is not available for the investor type or country you selected.
Browse all ResearchPool reportsReport is subscription only.
Thank you, your report is ready.
Thank you, your report is ready.