MOSL: ESCORTS (Upgrade to Neutral)- Healthy progress across segments,
Escorts: Healthy progress across segments, upgrade to Neutral
(ESC IN, Mkt Cap USD1.5b, CMP INR951, TP INR982, 3% Upside, Neutral)
- Revenue, EBITDA, PAT in-line: ESC's revenue increased 40.5% YoY (+19.2% QoQ) to INR14.4b (in-line). Tractor, construction equipment and railway businesses grew strongly by 36.4%, 44.5% and 14.2%, respectively, led by healthy volume growth. EBITDA margin was flat QoQ at 12.1% (est. of 11.6%), as the benefit of lower staff cost (-110bp QoQ) was partially offset by higher RM cost (+90bp QoQ). Higher other income of INR226m (est. of INR90m) led to adj. PAT growth of 134% YoY to INR1.1b (in-line).
- FY18: Revenue/ EBITDA/ PAT grew by 21.5%/ 72.1%/76.3%.
- Earnings call highlights: a) Domestic tractor industry to grow 9-11% in FY19, and ESC to outperform led by new product launches. b) Tractor market share for FY18 at 11% (+20bp), 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 over last 15 months at ~4%, of which ~3% has been passed on. e) Took price hike of 0.8% in Apr-18. f) Expect ~100bp margin improvement in FY19, led by operating leverage and cost control. g) Targets tractor exports growth of 50% in FY19.
- Valuation view: We upgrade ESC to Neutral, given the strong outlook across businesses and with efforts of cost rationalization starting to bear fruit. Market share gains in the core tractor business and sound capital allocation are expected to result in RoE improvement of 3% to 20.3% by FY20. We upgrade our earnings estimate by 6%/11% for FY19/20, factoring in healthy volume growth across segments and ~200bp EBITDA margin expansion to 12.8% in FY20, leading to earning CAGR of ~29% over FY18-20. We upgrade the target multiple to 15x (earlier 14x) to reflect the improvement across businesses. However, in our view, valuations largely capture the expected positives. We value the stock on 15x FY20E EPS to arrive at a TP of INR982.
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.