ESCORTS -An Agri-Infra BAHUBALI In The Making

Equity markets are trading at all-time highs and Escorts certainly is no exception. Escorts is travelling in uncharted territory and is making new highs as investors continue to be rewarded for their sound investment pick.

Escorts, if one looks carefully, is a perfect blend of businesses that promise to tap the India growth story meaningfully. Escorts has three primary business divisions:-

a. Agri-Machinery Business

b. ECE (Escorts Construction Equipment)

c. Railways Equipment Division (RED)

With these three business divisions, Escorts can be seen operational in agriculture sector, which also is the largest employer in India, and the infrastructure sector, which is a focus sector for the current government and promises to grow rapidly in the coming years.

Escorts is engaged in the core sectors of the economy and its businesses make a unique contribution to the growth and development of the nation.

KEY MACRO TRIGGERS

India's infrastructure and construction industry is at an inflection point currently. Owing to the government's renewed focus on developing Smart Cities and other infrastructure project that are expected to stimulate growth, the construction and construction equipment companies can expect to see decent amount of growth in the years to come. The renewed thrust on infrastructure can be expected to be a major driver of economic transformation and this transformation will help restore the growth momentum of Escorts construction equipment business that comprises a range of efficiency-enhancing equipments.

The railway equipment division is yet another growth engine that can contribute incrementally to the company's fortune in coming years.

Indian Railways (IR) is expected to invest huge amount of capital in coming five years as per the 5 -Year Plan. The government has planned cumulative investments of Rs.11.67 lakh crore between 2015-19 in segments such as rakes, tracks, bridges, network expansion, electrification, signalling and safety. This is over and above the investment in coaches, wagons, locomotives and the like to the tune of Rs.1.67 lakh crore.

This potential capital outlay can act as an investment trigger that will provide growth opportunities for Escorts. The opportunity from IR could be huge for Escorts, as the company has demonstrated capabilities in ride-control products, strong multi-year relationships and robust product development cycles. Given the government’s focus on revitalising IR, the company is excited on the future outlook of this business. To capture the opportunity, its endeavour would to expand its product range either through in-house development or through technology partnerships.

COST LEADERSHIP STRATEGY

Escorts, by adopting cost leadership strategy, has been able to expand its margins. The company under its Project Shikhar has been able to converge its various engineering programmes and practices. The successful implementation of project Shikhar has allowed the company to adopt a three-pronged approach – reduce material costs, build a lean and dynamic supplier base and moderate inventory in a bid to liberate working capital.

ESCORTS KEY STRENGTHS

Escorts has a unique consumer-centric approach and possess robust intellectual pool that uses technology extensively.

The company's pan-India distribution channels provides the company a competitive advantage. A comprehensive product suite across divisions augurs well for the company's growth prospects as well.

Escorts well thought out positioning in the markets as a comprehensive mechanised farm solutions player augurs well for the company. The company has been regularly launching products that are suited for specialised farm applications, thus keeping the growth momentum intact for the division.

The company has been able to expand the distribution network by building stronger partnerships with the dealers. The company aims to strengthen the ecosystem where the company stocks spare parts on an 'anytime-anywhere' basis and provide proactive service, leading to customer delight and retention.

With extensive dealership promotion of Powertrac and Farmtrac brands, Escorts is looking towards achieving a pan-India presence by penetrating untapped markets, which will facilitate growing market share for the company. All of the above unique facets of Escorts are its core strengths that shall help the company remain in growth trajectory assuming the macro business environment remains conducive.

CONCLUSION :-

Escorts has got everything in place, viz., cost leadership strategy, lean and dynamic supplier base, pan-India distribution channel and positioning as a comprehensive mechanised farm solutions provider for its agri-business environment to take advantage of the India growth story. Escorts presence in the core sector such as infrastructure, construction, railways and agriculture aligns the company's fortune with that of India's economy very well. The railway equipments division can prove to be growth engine, given the five-year growth plans of Indian Railways.

The company's ability and focus on launching new product to gain market share has been successful in the recent past and may continue to benefit in future as well. The company aims for significant product expansion and geographical spread, thus providing new growth vistas. The new models launched in various business segments are creating product pull-based market demand amongst perspective buyers for Escorts.

With growth opportunities galore in all the four business divisions of Escorts, the company can keep the growth momentum alive and continue to reward shareholders in the coming years. Even though the valuations at this point of time are stretched in line with the overall markets, Escorts provides an opportunity for long term investors to hold on to a growth stock.

Taking a cautionary view on valuation, we recommend 'Hold' on Escorts. The stock, however, can be bought in a staggered fashion and can provide excellent buying opportunity if prices correct hereon.

Escorts Agri Machinery Business

- To focus on several new markets, especially Europe, Africa and South East Asia and provide India’s best of technology at an affordable price.

- The improvement in rural liquidity and increase in non-agri component of rural incomes is a strong positive, since demand will have lesser sensitivity to monsoon.

ECE (Escorts Construction Equipment)

- With the development thrust from government in infrastructure, construction equipment market is expected to witness a rapid growth.

- Going forward, the construction equipment industry will continue to grow at 15%-20%.

Railways Equipment Division (RED)

-Escorts is one of a key suppliers to Indian Railways for products, including brake systems, couplers, shock absorbers, etc - with a focus on safety, comfort and environment.

- With this wide product range and in-house R&D capabilities, Escorts is well-poised to capture the immense opportunity from the Indian Railways.