Retain ‘buy’ on Escorts with Fair Value of Rs 1,300

Maintain ‘buy’ with an unchanged Fair Value of Rs 1,300.

Benefitting from upcycle in tractor, Escorts reported Ebitda of Rs 1.2 billion, 19% below our estimates due to weaker performance of non-tractor segments. We believe tractor industry demand should be at the forefront of recovery given record rabi output supported by higher crop prices and adequate water reservoir levels once the supply chain normalises. Maintain ‘buy’ with an unchanged Fair Value of Rs 1,300.

Escorts reported 1QFY21 Ebitda of Rs 1.2 billion (-16% y-o-y), which was 19% below our estimates mostly led by sharper-than-expected revenue decline in construction equipment and railway segments and deterioration in gross margins due to reversal of finished goods inventory. Revenue declined by 25% y-o-y due to 75% y-o-y decline in construction revenues, 13% y-o-y decline in tractor revenues and 54% y-o-y revenue decline in railway segment revenues in 1QFY21.

Ebitda margin came in at 11.3% (+130 bps y-o-y and -280 q-o-q), which was 110 bps below our estimates due to weaker-than-expected gross margins and negative contribution from the construction equipment division, partly offset by cost-cutting initiatives. Gross margins came in at 32.9% (+190 bps y-o-y and -490 bps q-o-q), which was 410 bps below our expectations due to reversal of higher finished goods inventory.

Escorts reported net profit of Rs 922 million (+5% y-o-y), which was 15% below our estimates due to miss at Ebitda level. Tractor EBIT margin came in at 14.5% (up 360 bps y-o-y), which was 50 bps above our estimates due to a better product mix, lower commodity prices and cost optimisation. Construction equipment EBIT margin came in at -32% due to negative operating leverage in 1QFY21.