Have A Firm Ride On Escorts

Agriculture plays the most crucial role when it comes to Indian economy and its prosperity. Over 58 per cent of the rural households depend on agriculture as their principle means of livelihood. Therefore, demand for farm related equipments especially tractors is huge. India's economy in the second half of the year has gained momentum, with the Indian economy achieving 7.6 per cent of GDP in 2015-16, the condition for trade and finance looks favourable. In fact, the Finance Ministry has estimated India's 2016-17 economic growth at 8 per cent on the projections of good monsoons driving the agro-rural economy, improvement in domestic private investments and reform oriented policies which will foster business environment.

Industry

The Indian tractor market is the largest in the world and is expected to see more foreign brands coming in soon because of high growth potential and low loyalty factor among its consumers.

Tractor sales declined by 10.5 per cent at 493k units against 551k in FY15. Sentiment of the farmers and the industry has been dampened firstly due to agro-climatic conditions. However, with above normal rainfall this year, the prospect of the tractor sales looks promising. The construction equipment industry witnessed a growth of 15 per cent in FY16. The pick and carry cranes industry went up by 9 per cent in FY16, compactor and BHL industry has gone up by 33 per cent and 5 per cent respectively. Apart from the tractor and construction equipment's segments, escorts have also forayed into railway equipment business and auto products segment. Government plans to invest Rs 11.67 lakh crores in railways network from 2015-19 in segments such as rakes, tracks, bridges, network expansion, electrification, signalling and safety. Government is planning to invest Rs 1.67 lakh crores in coaches, wagons.

About

Escorts is an Indian engineering company that operates in the sectors of agri-machinery, construction and material handling equipment, railway equipment and auto components. Headquartered in Faridabad, Haryana, the company was launched in 1944 and has marketing operations in more than 40 countries. Escorts is a leading material handling and construction equipments manufacturer, the company manufactures and markets a diverse range of equipments like cranes, loaders, vibratory rollers and forklifts. The company today is the world's largest pick 'n' carry hydraulic mobile crane manufacturer. The company's product range includes tractors i.e. Farmtrac, Powertrac, Escort, Engines, Implements & Trailors, Lubricants ECEL, Hydraulic Mobile Cranes, Compactors, Forklifts, Articulated Boom Cranes, Railway Equipment and Auto Component.

In the month of September, Escorts has registered double numbers as the company sold 7725 units, an increase of 38 per cent YoY. The company on October 6 has informed the bourses about its Q2 sales numbers. In Q2FY17 it sold 15482 units which includes domestic as well as export numbers and has increased by 35 per cent as compared to Q2FY16. In the entire FY17, exports of the company have fallen by 21 per cent. Overall, the company sold 31845 units which have increased by 21 per cent.

Peer Group Comparison

Tata Motors, Ashok Leyland, VST Tillers Tractors, John Deere, HMT, Mahindra Tractor are the major competitors of Escort. Tata Motors has the largest market cap of 1,77,166.61 crores. However, quarterly profit variances of Escorts are better as compared to its industry peers. On the other hand, the company has diversified its operations and has forayed into manufacture of rail equipment and auto component.

Financials

In the financial year ended March 2016, consolidated gross sales stands at Rs 3618.32 crores which has decreased by 14 per cent as compare to the previous year. PBIDT has reduced by 9 per cent and stands at Rs 207.01 crores. However, the company has manged to be profitable and posted a net profit of Rs 76.70 crores which has increased by 1 per cent as compared to the previous year.

The company has a strong balance sheet, reserve and surplus of Escorts in this fiscal has increased by 2 per cent and stands at Rs 1750.28 crores. On the other hand, total debt has reduced by 26 per cent and stands at Rs 360.51 crores. Total current liablities has decreased by 3 per cent YoY and stands at Rs 1340.68 crores.

Escorts has posted impressive numbers in Q1FY17. Net sales stands at Rs 1047.35 crores which has increased by 9.45 per cent. PBIDT in Q1 stands at Rs 87.76 crores which has increased by 52.41 per cent as compared to Q1FY16. PAT has stands at Rs 46.95 crores which has increased by 33.47 per cent as compared to corresponding quarter of the previous fiscal.

Segment wise revenue

In the financial year ended March 2016, Escorts Agri Machinery Divisions revenue was down by 14.1 per cent and stood at Rs 2739.4 crores. EBIT for the division stood at Rs 222.1 crores in year ended March 2016 against 229.3 crores in year ended March 2015. The company's auto product division's revenue in this fiscal stands at Rs 92.4 crores which has decreased by 11 per cent YoY. Railway Equipment Divisions revenue stood at Rs 205.4 crores in year ended March 16, which has increased by 12 per cent as compared with the previous financial year. Escorts Construction Equipment Divisions revenue stands at Rs 455.6 crores which has plunged by 11 per cent as compared with the financial year ended March 2015.

Valuation

With market capitalisations of Rs 4778.17 crores, the company is valued well at its current levels. ROE in the last 3 years stands at 8.49 per cent. Debt/Equity ratio stands at 0.19 which is heathy as compared to industry peers. ROCE stands at 6.46 per cent and RONW stands at 4.97 per cent. The trailing twelve-month P/E ratio stands at 49.34 which is quite healthy than the industry P/E of 25.34. The company's EPS stands at Rs 8.16. The shares of the company are on a jolly ride from the last 3 months as the scrip has surged by 76 per cent. In the last 6 months, its share has given a return of 161 per cent. Fifty-two week high/low of the company stands at 414.20/112.70. The stock is trading at 2.54 times of its book value. Company has given a dividend payout of 12.59 per cent over last 3 years.

Conclusion

The rural economy has been under stress since last two years due to droughts and fall in global prices of primary agriculture commodities. The rural distress is evident from low growth in real income and falling rural demand. The current announcements and actions by the government will boost agriculture sector and thereby to rural economy by proposing almost 84 per cent increase in budget allocation for agriculture and irrigation sector. Company in this fiscal has launched "Euro 45" and "Euro 50" series under Powertrac brand and "Classic" series under Farmtrac brand in 41-50 HP category. The market response for all the newly introduced models has been very positive. Escorts market share increased from 9.7 per cent to 10.9 per cent in 41- 50 HP category in FY16. On full year basis your company's volumes are down by 15 per cent to 2,555. On the financial front, company has posted strong numbers in Q1FY17. Above normal monsoon has certainly boosted the sentiment in this stock therefore we suggest our reader-investors to hold this stock.

Arun Agarwal

Deputy Vice President Kotak Securities (PCG Research)

Domestic tractor demand is dependent on various factors like monsoons, crop production, minimum support prices, credit flow, government focus and the general state of the rural economy. While various factors influence tractor demand, monsoon is the most critical as it has a cascading impact on farmers' income. Good monsoon this year is expected to have a positive rub-off on demand.Rainfall during the current monsoon has been near normal unlike last two years where a drought-like situation had gripped the country. Accordingly, domestic tractor industry volumes declined by 13% in FY15 and 11% in FY16 - from a high of ~634,000 units in FY14 to ~493,000 units in FY16. After witnessing two years of double-digit volume decline, now tractor demand looks all set to recover in FY17. Relatively good monsoons this year, compared with past two years, has buoyed demand sentiments. Strong demand momentum witnessed in 1HFY17 is likely to continue in to 2HFY17. Given low base, higher farm output expectation from good monsoon and government focus, domestic tractor industry is likely to witness double digit volume growth in FY17.

Dhananjay Sinha

Head,Institutional Research

Emkay Global Financial Services Ltd.

Escorts expects 10-15 per cent of tractor volume growth on a yearly basis, with increase in average realisations for its agri-machinery segment for the next three years. We believe demand to be robust on account of: (a) normal monsoon, (b) government's focus on agri-economy, (c) expected increase in farmers' income due to-crop Insurance, MSP and upcoming elections in few states. The company's focus is to increase its presence in key states in the southern and western regions of India where M&M owns majority market share. Additionally, the company is also separating the distribution channel for farm and power tractors. Around ~80 per cent of the tractor segment revenue is driven by six states (UP, MP, Haryana, Punjab, Rajasthan, and Bihar). Given the easy availability of financing schemes (Kisan Central Card, PSU banks, ICICI, HDFC, Magma, Sriram), management expect further increase in the tractor penetration level from the current ~30 per cent to ~50-60 per cent over the medium-term. We expect FY17/18E could each be successively better years as we see improvement in Gross Fixed Capital Formation, increase in government capital spending and rate cuts by the RBI. An above average monsoon and higher government allocation towards rural sectors would catalyse growth in the vital rural sector. Implementation of the 7th Pay Commission recommendations (and OROP) would also spur growth going ahead.