Accumulate Escorts; target of Rs 1334: Dolat Capital Market

Dolat Capital Market's research report on Escorts

Escorts (ESC) reported strong all-round performance in Q2FY21. EBITDA jumped 137% YoY to Rs 3bn with significant margin expansion at 18.3% (+878bps YoY; +708bps QoQ) on account of better mix (2/3rd sales for 40HP and above tractor), softening of commodity prices and cost control measures.  The net revenue grew 24% YoY to Rs 16.4bn led by 32.8% growth in Agri machinery products and 26.4% growth in railway equipment, partially offset by 22% de-growth in the Construction equipment segment. Management stated that the overall rural sentiment is positive because of the record output of Rabi crop along with better realization, strong Kharif sowing season and easy availability of retail finance. Management expects demand momentum to continue with supply chain issues smoothing out. Moreover, the current inventory at channel level is very low and re-stocking will also aid in volume growth in the coming quarters. Construction equipment demand is also picking up with revival in the macro-economic activities. The railway segment order book has been slower due to postponement of orders to FY22. However, management expects the situation to improve by January’21 with resumption of normalcy. We sense margin to taper off in coming quarter due to 1) sharp up move in commodity prices and normalization of product mix.

Outlook

We increase EPS estimates by 14/4% for FY22/23E factoring in expansion in margin led by better mix and cost control measures. We forecast 16% EPS CAGR over FY20-23E and value the stock Rs 1,334 (16x for FY23E EPS) and retain Accumulate rating.

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