Escorts’ Q3 results are in-line; all eyes now on demand recovery
Premium- Escorts management expects raw material prices to further increase in Q4FY22 and also expects recovery in tractor volumes on the back of strong agro-economic factors
Escorts Ltd’s December quarter results (Q3FY22) are not particularly exciting, but they aren’t bad either. Standalone revenues fell by 3% year-on-year (y-on-y) to about Rs1958 crore. Late monsoon rains and delayed harvest of Kharif crops impacted cash flows, leading to subdued rural demand in Q3. This means tractor and construction equipment volumes declined. This was, though, partly offset by price hikes and favorable mix.
While the domestic tractor industry was down by 13.5% y-o-y, Escorts saw an even steeper fall of 22.4% y-on-y in its domestic tractor volumes. As such, growth in export volumes and improvement in net realizations by 13.5% y-o-y restricted the fall in Q3 tractor revenues to 9% y-o-y to Rs1505.6 crore.
“Exports and volumes of 40HP+ tractors continue to outgrow other segments, led by new product development, increasing share of business with Kubota Corporation (Japan) and focus on distribution network," said analysts at Sharekhan in a report. Note that Escorts’ domestic tractor market share has increased sequentially.
Meanwhile, revenues from the construction equipment business and railway products division in Q3 rose by about 13% y-o-y and 48% y-o-y to Rs276 crore and Rs174 crore, respectively.
Headwinds in the form of raw material cost inflation led to decline in total earnings before interest, tax, depreciation and amortization (Ebitda) margin by 450 basis points (bps) y-o-y to 13.5%. One basis point is 0.01%. The management expects raw material prices to further increase in Q4FY22.
The management also expects recovery in tractor volumes on the back of strong agro-economic factors. FY22 industry volumes are estimated to decline by 4-6% y-o-y. According to Motilal Oswal Financial Services, “Although, the volume decline may not be sharp as --a) agro-economic indicators and farm-level sentiment are still positive, and b) recovery in non-agri applications is diluting the weakness in the Agri segment. We estimate Tractor industry volumes to see a 3% CAGR decline over FY21–24E."
Further, the partnership with Kubota, which is a global major in agriculture and construction equipment, will accelerate the process of Escorts becoming one of the leading players in the farm equipment sector. Sharekhan analysts pointed out, “We expect the company’s earnings growth to moderate in the medium term, though free cash flow would be healthy, given a strong balance sheet. The expected infusion of Rs1,872 crore in the company through preferential allotment to Kubota Corporation to further strengthen balance sheet."
With the shift in the industry towards sustainable options, the company is optimistic about electrification in tractors. As diesel accounts for 60-70% of the operating costs in tractors, electrification in this segment will be favorable as electricity is subsidized for the farmers. Currently, it is test-marketing its electric tractors (in the 25HP range) in the US and EU markets.
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In the past six months, shares of Escorts have risen more than 50%, suggesting investors are capturing a good portion of the optimism into the price.
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