ESCORTS LIMITED: Riding The High Wave Of Success
Given its strong presence in such infrastructure-related segments as railways, agriculture and construction, On an overall basis, the company is well poised to take a leap of growth in the future as the economy advances
From producing new ground for Indian infrastructure to nurturing the earth with harvests of prosperity, from mobilising the economy on the rail tracks of progress to being its driving force on the highways of the nation, Escorts Limited is transforming lives with the power of technology and imagination. Committed to engineer a better world, the company combines infinite possibilities of human calibre along with innovative engineering solutions. Each and every day it helps fulfil the aspirations of every life it touches.
Possessing technological and business collaboration with world leaders over the years, bearing globally competitive indigenous engineering capabilities and owning over 1,600 sales and service outlets and footprints in over 40 countries have been contributing to making Escorts a multinational company.
The company operates in three segments, namely, agriculture machinery, construction equipment and railway equipment. The company’s foray into farm mechanization has helped in transforming the farmland challenges of rural India into yields of opportunity. The company is helping India harden its presence in the agriculture sector and make this core segment one of the strongest contributors to the national economy. The company customizes its products around specific farmer needs. As a result, it is not only enhancing their productivity, but also bringing happiness and prosperity to their doorstep.
In the construction equipment segment, Escorts provides equipment for material handling, road building and earth moving, addressing the large national opportunity with a comprehensive basket of products. In the railway equipment segment, the company ensures safety, comfort and reliability to address the growing needs rail travel in the country. The keynote of its strategy is to have a presence across the rolling stock segments for passenger coaches, locomotives, wagons, EMUs and metro/MRTS.
Sector Overview
India’s agriculture sector has a share of approximately 16 per cent of India’s GDP and employs 43 per cent of its workforce. With increasing farmer education and focus on mechanisation, the sector has seen growth in yield and production over the years. Tractors have historically played a dominant role in farm mechanisation and increasing productivity across the world. Over the decades, India has become the largest producer of tractors in the world and a major exporter, though the domestic industry retains its growth potential with significant headroom. Inter-state differences in mechanisation levels give a room of considerable opportunity for growth.
The Indian tractor industry witnessed a phenomenal bounce-back after lockdown last year and registered the highest ever recorded growth across the domestic and exports markets. The domestic industry saw robust growth in volumes of 27 per cent to 8.99 lakh tractors in FY 2020-21 as compared to 7.09 lakh tractors in the previous year. Additionally, the domestic industry was boosted by continued government support in the agriculture sector and favourable macro and micro economic factors, resulting in strong rural cash flows. What augured well for the company is favourable crop production, crop prices, water facility, reverse migration of labour, availability of retail finance, increased savings and good monsoon.
Financial Overview
The financial performance of the company reveals that on a consolidated quarterly basis the net sales and other operating income increased to Rs1,701.79 crore in Q1FY22 as compared to Rs1,089.26 crore in Q1FY21, clocking gains of 56.23 per cent. The operating profit recorded at Rs285.22 crore in Q1FY22 as compared an operating profit Rs152.57 crore in Q1FY21, zooming by 86.94 per cent. Q1FY22 recorded a net profit of Rs188.84 crore as compared to net profit of Rs94.03 crore in the same quarter in the previous year, registering significant gains.
On the annual front, its net sales and operating income de-grew by 4.52 per cent from RS1,038.70 crore in FY20 to Rs991.76 crore in FY21. The operating profit expanded by 22.92 per cent in FY21 as compared to FY20.The net profit rose by 42.8 per cent in FY21 recording Rs142.08 crore as compared to Rs99.5 crore in FY20.
Segment Update
Escorts Agriculture Machinery (EAM): In concurrence with the market, the company registered a robust performance during the year, registering a 24.1 per cent growth in volumes for FY 2020-21, and highest ever EBIT margins at 18.2 per cent went up by 521 bps as against 13 per cent last year. The registered profitability is on back of its keen focus on cost efficiencies, better product mix and higher operating leverage. Clocking a 29.9 per cent growth, the export segment’s growth rate outperformed the industry average in FY 2020-21, augured by new product introduction and penetration in new markets. On the domestic front there was a slight drop in market share, which stood at 11.3 per cent as of March 2021 as against 11.6 per cent in the previous year.
In terms of segment distribution, the company witnessed an improvement in its above-40 HP tractors segment, which contributed 62 per cent of the company’s domestic sales in FY20-21 against 51 per cent in the previous fiscal. As a result, there were significant model mix gains and the com-pany’s success of new products in the higher HP range also beamed through. With continued efforts around channel expansion, the company’s total dealer count has crossed 1,100 in India.
Escorts Construction Equipment (ECE): Escorts’ total volumes, comprising both manufactured and traded products, marginally contracted by 3 per cent, recording a sales volume of 3,911 machines in FY 2020-21 against 4,042 machines in FY 2019-20. However, the company outperformed the market in the second half of the year, with its volumes expanding at 41 per cent despite the continued supply chain challenges. The revenues earned by the company also went through pressure due to the ongoing pandemic, standing at Rs776.1 crore as against Rs839.8 crore the previous year. Meanwhile, the company was able to maintain the EBIT margins, taming the obstacles such as loss of operational leverage and an unfavourable product mix. A rise was seen in the dominance low-margin PnC from the hydra category to 58 per cent as against 47 per cent recorded in the previous year.
The JV with Tadano provides the company an opportunity to fill key white spaces in the high margin cranes segment. The portfolio, including rough terrain and truck-mounted cranes, in the fast growing 20-80 tonnage category caters to big construction companies servicing oil refineries, metro rail projects, smart city construction, solar power projects and ports, among others. On the other hand, Escorts distributorship agreement with Doosan Infracore has enabled it to cater to a much larger proportion of the overall construction equipment industry, with crawler excavators and wheel loaders.
Escorts Railway Equipment (ERE): The order book for this division registered at more than Rs340 crore as of the end of March 2021 and is expected to be executed within the first three quarters of the year. As the department releases fresh tenders, the company expects the pent-up demand to provide a boost to the segment, and revenue to grow in the initial double digit, although the operating margins for the segment are likely to remain of around 16 to 18 per cent.
Recently, the company has received the Research Designs and Standards Organisation (RDSO) approval for its new products-air spring, brake disc and brake pads for passenger coaches. The products have been launched for field trials and are expected to be commercialised by FY23-FY24.
Future Outlook
Talking about the EAM segment, the company's focused market strategy of developing dual distribution strategy for our brands, along with its unswerving product innovation, positions itself well to expand its market share. The company’s financing solutions for channel partners, technology-driven sales management and comprehensive after-sales support gives it a unique advantage. Additionally, the company sees a strong development in its global position post the kick-off of sales late last year through the global Kubota network.
Regarding the ECE segment, the ongoing second wave has adversely affected the company’s production due to the shortage of certain critical items, including industrial oxygen. The company expects the situation to stabilise and the segment to grow in the higher single digit during FY 2021-22. It also foresees further expansion in its margins on the back of long term strategic operating metrics and cost control measures undertaken over the past years.
The company bears an optimistic outlook regarding the railway components industry. Strong recovery is expected in the segment after a slowdown in tendering due to the pandemic. The mid to long-term factors remain strong, supported by expansion and upgradation projects being undertaken by the Indian Railways. The industry also continues to be buoyed by increasing urbanisation, rising disposable incomes across rural and urban India, and growing industrialisation across the coun-try along with private sector participation. On an overall basis, the company is well poised to take a leap of growth in the future as the economy advances. Hence, we recommend a BUY for Escorts Limited.