Recommendation From Commercial Vehicles Sectors

This column gives you scrip chosen by the research team during the fortnight that is fundamentally strong and expected to give good capital appreciation over a time period of 1 year

Escorts Limited 

DRIVING ON THE GROWTH PATH IN TOP GEAR 

HERE IS WHY
Innovative spirit of the company
Outstanding financial numbers
Consistency in product pipeline 

Escorts is one of the foremost tractor manufacturers offering more than 225 variants (12 to 75 HP) in the domestic market. The company derives 78.7 per cent of its revenues from the Escorts Agri Machinery (EAM) segment. Almost 15.6 per cent of total its revenue is derived from the Escorts Construction Equipment (ECE) segment.

One of the areas in which Escorts is active is the railway equipment division (RED). The company derives 5.7 per cent of its total revenues from this division. Escorts, in past few years, has managed to scale up successfully its operations. It has been able to do so by focusing on new products, which has helped the company stabilise its market share. Escorts has been able to manage its costs efficiently, thus improving its gross margins. Closing down the nonprofitable ventures has also helped the company boost its gross margins.

With a strategic aim of gaining market share in tractors segment, Escorts is well-poised to grow in the coming years. The company aims to take its market share to 13-14 per cent from its present 11 per cent. One of the areas where the company is able to focus is on aggressively expanding its distribution network. Escorts management intends to take Powertrac deeper in its opportunity markets of South and West. Escorts by improving shop floor productivity and combining back-end function across divisions aims for 200-300 bps reduction in other expenses. 

The order book for railway division stands at Rs 300 crore as on Q1FY19. The revenue share from the railway division is likely to increase further in the coming years owing to the introduction of new products. 

Escorts is banking on offering products that are central to its aspirations of growth and has an enriched product mix that diversifies risk and helps counter cyclicality. 

On the financial front, the net sales of the company jumped by 29.93 per cent and stood at Rs 1511.28 crore in Q1FY19 as against Rs 1163.15 crore in Q1FY18. The PBIDT in Q1FY19 came in at Rs 185.54 crore in the first quarter of FY19, a growth of 90.22 per cent from Rs 97.54 crore in the same quarter of the previous year. The profit after tax (PAT) has surged 90 per cent YoY and stood at Rs 119.56 crore in the Q1FY19 versus Rs 62.64 crore in Q1FY18. 

On the annual front, the company’s net sales recorded in FY18 were Rs 4995.12 crore, an increase of 20 per cent from Rs 4147.07 crore in FY17. The PBIDT of the company witnessed a growth of over 75 per cent and stood at Rs 616.63 crore in FY18, while in FY17 it was Rs 350.63 crore. The PAT grew by over 100 per cent in FY18 at Rs 344.72 crore as against Rs 160.44 crore in FY17. 

Focus on innovation, higher spend on R&D, data driven sales process along with the increasing need for mechanised farming in India augurs well for Escorts. We recommend investors to BUY escorts