PremiumEscorts Ltd – one of the country’s largest tractor manufacturer – could report low single digit increase in volumes in FY 22 due to the impact of the second covid wave in the rural areas and the high base of last year. Continuous increase in commodity prices will also have a negative impact on the operating margins of the company.
The management though expects a strong recovery in sales after the lockdown since agriculture output in FY 22 will continue to be robust.
“While all macro/farm economic indicators and availability finance positive, impact of the Covid-19 pandemic in rural India can act as a dampener. Currently, two-third of dealers are either closed or open for limited hours. Hence, the management expects FY22 industry growth at mid-single digits," said analysts of Motilal Oswal in report.
“We cut our FY22E/FY23E Earnings Per Share by 9%/7% to factor in weaker volumes and higher Raw Material cost. We lower our target P/E multiple to 14x (from 15x earlier and at a premium to its five-year average of 12.4x) to factor in near peak cyclical earnings in FY23E," they added.
Escorts reported a sharp 128% year-on-year in increase net profit to ₹285.40 crore as result of substantial growth in tractor, construction equipments and railway machinery segments. The company reported a net profit of ₹128 crore in the year ago period.
The total revenue from operations during the quarter also jumped by a whopping 60.8% to ₹2229 crore as a consequence of ₹62% jump in sales of tractors to 32588 units. The operating profit or the Earnings from Interest, Tax, Depreciation and Amortisation (EBITDA) of the company jumped by 88.9% to ₹344 crore, while the operating margin expanded by 230 basis points to 15.4% as a result of the stringent cost cutting methods adopted by the company.
Ever since the unlocking of the economy took place from May last year , sales of tractors witnessed faster than expected rebound due to less impact of Covid-19 in rural areas and government incentives helped protect farm income. A bumper summer crop also helped push sales of tractors.
According to analysts of Emkay Global, in addition to the high base, a deeper Covid-19 impact in rural areas, lower subsidy support from state governments and high dealer stocks should impact wholesales. The domestic tractor volumes are near the peak and may witness 7% decline in CAGR over FY21-23E.
“We expect a low 4% CAGR in revenue over FY21-23E, despite 19%/13% growth in Construction Equipment/Railways, owing to weakness in the Agri segment. We expect earnings growth to be lower at a 1% CAGR over FY21-23E. We downgrade the rating to Hold with a revised TP of Rs1,240 (earlier Rs1,500), based on a core P/E of 14x on FY23E (earlier 16x)," added analysts.
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