Escorts share price: HDFC Securities maintains ADD rating with a target price of Rs 1480

Escorts’ Q3 FY21 EBITDA at Rs 3.6 bn (+18%, -30 bps QoQ) was largely in line with estimates. The tractor industry maintains a healthy growth outlook, driven by a good rabi crop and sustained government support. HDFC Securities maintains ADD rating with a target price of Rs 1480 at 16x FY23E EPS. HDFC Securities FY22/23E estimates are largely unchanged. We recommend accumulating the stock on declines.

Escorts Q3 FY21 financials:

(1) Tractors volume at 31.5k units grew by 26/29% YoY / QoQ. The average realisation at Rs 639k was down 2/5% owing to a change in mix (Powertrac’s share increased and; sales of sub-40HP tractors increased in the mix as commercial tractor demand revived)

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(2) Revenue at Rs 20.1bn grew 23.5% YoY. The company recorded an EBITDA margin of 18.0% (-30bps QoQ, +510bps YoY), driven by better product mix and operating leverage

(3) Agri/RED segment’s EBIT margin came in at 20/12.7%; ECM revenue at Rs 2.44bn grew 13/56% YoY/QoQ. EBIT margin at 7.5% (vs 4.8/1.7%)

(4) Escorts PAT at Rs 2.81bn grew 83/22% YoY/QoQ.

Escorts Key highlights:

(1) Strong retails: The management highlighted that the retail momentum is strong and supported by higher production levels. While most players have raised inventory, the industry stock levels remain below pre-Covid levels.

(2) Commodity cost pressures: In 4QFY21, margins will be impacted by input cost escalation of 5%, against which the company has already taken a price hike of 2% in Nov-20. Escorts is planning to take another price increase in early Q1 FY22.

(3) Railway segment: The company has Rs 3.3 bn of order book with an execution timeline of 6-8 months. In FY21, rail revenues remain flat YoY. The tendering process will get back to the pre-COVID level by the end of Q4 FY21. With the Government of India sustaining its commitment to IR, management is confident about the long-term growth potential of this segment.

(4) Construction equipment: Segmental volumes grew 20/53% YoY/QoQ to 1254 units. This segment is expected to grow, given the government’s focus on infrastructure.