MOSL: ESCORTS (Downgrade to Sell)-Early onset of festive season boosts 2Q-2HFY18 to remain subdued
Escorts: Early onset of festive season boosts 2Q; 2HFY18 to remain subdued; Valuations captured in price
(ESC IN, Mkt Cap USD1.4b, CMP INR760, TP INR688, -9% Downside, Downgrade to Sell)
Strong quarter driven by early onset of festive season: ESC’s overall revenue increased 23.3% YoY to INR12.1b (est. of INR11.9b) in 2QFY18. Construction equipment and tractor businesses registered strong growth of 23% and 22% YoY, respectively. EBITDA margin expanded 470bp YoY to 11.6% (est. of 9%) in 2QFY18, led by a decline of 80bp YoY in employee expenses (to 10.5% of net sales) and of 260bp in other expenses (to 11.1%). EBITDA rose 108% YoY to INR1,409m (est. of INR1,069m). Consequently, adj. PAT increased 104.8% YoY to INR822m (est. of INR657m).
Growth captured in 1HFY18, 2H to remain subdued: The domestic tractor industry witnessed growth of 21.3% YoY in 1HFY18, and is expected to grow ~12% on a full-year basis, leaving no room for significant growth in 2HFY18. ESC too witnessed 31.5% YoY growth in tractor volumes in 2QFY18 due to the early onset of the festive season, the operating leverage from which primarily led to significant margin expansion of 470bp YoY. Margin sustenance appears difficult on account of a weaker 2HFY18E compared to 1HFY18 (eliminating operating leverage play). Moreover, the low-margin construction equipment (ECE) business is expected to grow faster than the tractor business (25% volume growth in FY18 v/s 14%), which would keep the blended margin in check.
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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