ESCORTS: Maintaining Good Growth Momentum
With its various divisions that cater to a wide range of products right from tractors to construction equipment to railway equipment, Escorts Limited has maintained steady equilibrium except for the impact of the virus pandemic
Escorts Limited is an engineering company offering agricultural tractors and construction equipment. The company conducts business in segments related to agricultural machinery, automotive ancillary products, railway equipment and construction equipment. It primarily engages in the business of manufacturing engines for agricultural tractors, earth moving and material handling equipment, round and flat tubes, heating elements, double acting hydraulic shock absorbers for railways coaches, centre buffer couplers and automobile shock absorbers.
Its operations also include the production of telescopic front fork and MacPherson struts, brake block, internal combustion engine and various types of brakes used by railways. Escorts also trades in oils and lubricants, implements, trailers, tractors, compressor accessories and spares, construction and aeronautical business. It offers Euro Series under Powertrac, Classic Series in 41-50 HP under Farmtrac brand and FT 6055 Xtra Torque Tractor with approximately 20-speed transmission.
Industry Overview
India is considered as the biggest manufacturer of farm equipment. The country’s tractor industry makes up for almost one-third of the global market. During FY19, the domestic tractor industry grew by 8 per cent in volume terms to 7.9 lakh units compared to 7.3 lakh units in FY18. The growth in the construction equipment industry in India is positively backed by the Indian government’s plans and focus on developing infrastructure. Additionally, the government has also placed importance on being self-reliant on manufacturing of railway equipment needed for the railway infrastructure to improve urban-rural connectivity and increase the number of metro lines and metro rail projects.
Escorts Limited has been impacted by the disruptions caused due to virus pandemic and the subsequent lockdowns as well. During Q4FY20, the domestic tractor industry was down by 9 per cent YoY while de-growth by 19 per cent YoY was seen in the northern and central region and by 3 per cent in the southern and western region. Overall it is believed that rural areas aren’t much affected by the spread of the corona virus and owing to a record output of Rabi crop and prediction of a favourable monsoon in FY21, there could be recovery in demand in the tractor industry. The servedconstruction equipment industry that includes backhoe loaders, pick-n-carry cranes and compactors witnessed a fall by 23 per cent YoY in FY20.
Business Performance
Escorts Agri Machinery (EAM) is the flagship business of the company consisting of New Escorts Tractor Series (NETS) 70-90 HP having CRDi engine which is mainly part of the company’s global portfolio of tractors for its export market, FT 6090 which is also for the export market and Atom Series (21-30 HP) which is especially for use in orchards and vineyards. During FY19, the total EAM volumes grew by 19.9 per cent YoY to 96,412 units while domestic EAM volumes rose by 19 per cent to 93,323 units in FY19 from 78,446 units in FY18. Exports increased by 56.7 per cent to 3,089 units in FY19 from 1,971 in FY18. For Q4FY20, the total volumes were down by 20 per cent YoY to 20,108 units wherein domestic volumes dropped by 20.7 per cent to 19,122 units while exports were down by 3.8 per cent to 986 units. The revenue for the EAM segment contracted by 14 per cent YoY to Rs 1,058.4 crore for Q4FY20.
Catering to India’s growing infrastructure needs, Escorts Construction Equipment (ECE) business segment is the company’s second most important business after EAM. During FY19, the total volume of manufactured products for this segment rose by 23.6 per cent to 5,544 units from 4,486 units in FY18. Since the construction-served industry was down during Q4FY20, ECE witnessed degrowth of 32.2 per cent YoY as the volume figure was calculated at 986 units. Thus, the revenue for ECE dropped by 28.3 per cent YoY to Rs 210 crore. For the growth of ECE business, the company continues to focus on lowering material cost, expanding its dealer outreach and also enhancing its export footprint.
Escorts Limited’s Railway Equipment Division (RED) serves the Indian Railways with critical products, parts and components. During FY19, the revenue of RED experienced 37.5 per cent YoY growth to Rs 394.1 crore from Rs 286.6 crore in FY18. For FY19 the order grew by 40 per cent YoY to Rs 490 crore. For Q4FY20, the revenues for RED went up by 4.3 per cent YoY to Rs 108 crore.
Financial Performance
On a consolidated quarterly front, the company reported net sales of Rs 1,385.65 crore in Q4FY20, down by 15.97 per cent from Rs 1,649.08 crore in the corresponding period for the previous fiscal year. Operating profit for the quarter ended March 2020 came in at Rs 212.37 crore, up by 54.28 per cent from Rs 204.55 crore in the quarter ended March 2019. The company reported net profit of Rs 129.22 crore in Q4FY20, up by 9.66 per cent from Rs 117.84 crore in the same period for the previous fiscal year.
On an annual basis, net sales saw de-growth of 7.22 per cent to Rs 5,810.09 crore in FY20 as compared to Rs 6,292.02 crore in the previous fiscal year. The company reported an operating profit of Rs 760 crore in FY20 as compared to Rs 816.93 crore in FY19, registering a decline of 6.97 per cent. Escorts gained a net profit of Rs 472.80 crore in FY20, down by 1.47 per cent from Rs 479.86 crore in the previous fiscal year.
Outlook
For its EAM business, Escorts continues to identify gaps in its product offerings and partner with global experts to be able to enter new markets of possible opportunity. The company has further deepened its strategic collaboration with Kubota which will benefit its growth. For the manufacturing joint venture with a capacity of 50,000 units, Escorts and Kubota will engage in contract manufacturing. For the required factory which is under construction, the company has already made the first phase investment in FY19 while the second phase investment of around Rs 60 crore was done in FY20.
The commencement of production at the facility is expected to begin by Q3FY21, post which this partnership is expected to provide new growth paths for Escorts. This will not only be across product segments but also across geographies as new export markets where Kubota is already present will open up for Escorts. The company has witnessed a pent-up demand in its EAM business during the lockdown period which is expected to show growth during Q2FY21-Q3FY21.
Escorts is also exploring emerging allied business opportunities such as attachments, spare parts and after-sales service, among others, under the Sprayers-Harvesters-Implements- Planters (SHIP) Division. Along with an expected improvement in the company’s ECE and RED business and the already attractive tractor segments, the balancesheet of Escorts Limited looks very strong. The partnership which entitled Kubota to 10 per cent stake in Escorts and two board seats will further aid in improving Escort’s corporate governance. Hence, we recommend HOLD.