Analysts said growth outlook for the tractor sector was muted in the second half of the financial year given a high base. While the stock is also a potential acquisition target due to low promoter holding, analysts are in no hurry to recommend a buy on the stock for now.
“We believe tractor (industry) volumes would decline in H2 FY22, and there will be a similar trend for Escorts,” said Anand Rathi, while recommending a sell on the stock with a target of Rs 1,377. “Higher raw material costs will continue to be a headwind in the near to medium term. Rural sentiment has yet to return to normal and with only the festival season in the near term as a demand booster, we continue to expect overall volumes to decline this year.”
Phillip Capital, which has a target as low as Rs 915 on the stock, said it continues to maintain a negative view on the stock due to a high base, resulting in a decline in volume growth in subsequent months and adverse inventory situation. There is limited-to-no-room for incremental channel filling. Besides, it said higher inventory would lead to higher incentives and margins could continue to face strong headwinds from higher commodity prices.
The tractor manufacturer reported a 23.6 per cent decline in consolidated net profit at Rs 173.47 crore, compared with Rs 227.22 crore in the corresponding quarter last year. Revenue from operations rose 1.4 per cent YoY to Rs 1,662.3 crore, which analysts said was better than expected. A steep inflation in commodity prices and lower volumes resulted in lower Ebit margin of 15.1 per cent against 20 per cent in the corresponding period of the last financial year.
Analysts said tractor outlook is subdued for H2FY22 on account of a high base of last year. Rural sentiment has been temporarily affected by erratic rainfall in September, leading to delays in harvesting, they said. There could, however, be some recovery in sentiment on the back of healthy kharif crop output and expectations of good rabi crop output as the reservoir levels are high.
In September, a media report suggested that Japanese agriculture and heavy equipment firm Kubota Corp was in talks with the Nanda family — promoters of India’s Escorts — to increase its stake and eventually become a controlling shareholder in the tractor maker and engineering construction company. In a clarification to stock exchanges, the company said the news article was speculative, although it noted that Kubota was a joint venture partner and a shareholder of the company.
Emkay Global said Escorts is a potential acquisition target owing to a low promoter stake of 13 per cent, large cash reserves of nearly Rs 3,000 crore and rising shareholder activism. It said Escorts can benefit from a takeover by a company like Kubota in terms of technology support, access to a global sales network and opportunity for component manufacturing. Kubota could benefit from gaining access to the Indian tractor and construction equipment (CE) markets. “Despite a cyclical downturn in the agri segment, we expect an 8 per cent revenue CAGR over FY21-24, aided by 21 per cent/17 per cent growth in CE/Railways. We continue to value the business at a 13 times core P/E plus cash (total Rs 1,325) but now apply a 20 per cent acquisition premium, which yields our December 2022 target of Rs1,600 (earlier Rs 1,275),” it said.
What analysts said
Axis Securities has revised its rating on the stock to hold from buy, even as it revised upward its target price to Rs 1,450 from Rs 1,350 earlier, valuing the company at 15 times FY24 P/E. It considered muted tractor industry outlook and risk of a slowdown as reasons to downgrade its rating.
The stock traded at Rs 1,576.30 on Tuesday, up 1.95 per cent. Jhunjhwala’s 4.75 per cent stake in the company is valued roughly at Rs 1,000 crore.
Phillip Capital said it has a favorable view of potential order wins in the railway segment and construction activity picking up across the country, while exports also remain a promising opportunity especially with the Kubota alliance (not significant yet). “That said, all these segments continue to be relatively small (10 per cent of segment profits). Further, the stake purchase by Kubota, as is being indicated by media reports, could be a risk to our sell call. We lower our estimates slightly with agri volume degrowth of 9 per cent and EBITDA margins of 12.1 per cent for FY22,” it said.
At present, the stock trades at 17 times consolidated FY23 EPS, which is at a premium to its 10-year average of 10 times, due to an improvement in operating parameters as well as the Kubota partnership. “Considering a muted tractor outlook and the risk of a slowdown, we maintain our neutral rating with a target of Rs 1,510 per share,” Motilal Oswal Securities said.