Expert says Escorts shares have strong support at Rs 1200 – Rs 1180, breakout above Rs 1400

Farming and construction equipment-maker Escorts share price today is Rs 1281, up Rs 10 or 0.8%. IIFL Securities initiates coverage on Escorts with an ADD rating and target price of Rs 1470. The tractor industry, which clocked an exceptional volume growth of >25% in FY21, may continue growing even in FY22, albeit at a lower rate. However, industry profitability (% margin and Ebit/tractor) may come off in FY22 due to multiple factors. As a result, tractor industry earnings growth is likely to be subdued.

IIFL Securities says that it expects Escorts to outperform, with market-share gain in domestic tractors and high growth in exports. IIFL Securities said it found that Escorts’ improved margins, return-ratios and cash flows were under-appreciated by the market. Non-agri businesses and collaboration with Kubota can add to long-term growth prospects.

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Technical Analysis on Escorts:

Avinash Gorakshkar, Director Research at ProfitMart Securities said that since the last 2 months Escorts price is just consolidating Rs 1200 – Rs 1400 and not doing much but in this process is forming a nice flag pattern on a weekly basis.  It also has cloud support. Support level is Rs 1200 – Rs 1180, below which stop-loss will get executed. He is expecting that the stock will take support at this level and continue to further consolidate.  Upside only seen only above Rs 1400, says Avinash

IIFL Securities says that Escorts have outperformed the industry over FY16-21, with market-share gains in South and West India, where Escorts was traditionally weak. IIFL Securities also expect Escorts to report high growth in exports, helped by distribution of E-Kubota tractors through Kubota’s global distribution. Overall, it is expected that Escorts’ tractor volumes to grow 14% in FY22, vs. 10% for the industry. If Escorts finds traction in the non-agri segments (construction equipment and railways), it would add to the overall growth.

IIFL Securities says that over the years (even pre-FY21), Escorts has seen sharp improvement in margins, return ratios and cash flows. RoCE (ex-cash) has improved, from single-digits over FY11-16 to 50% in FY21. Average free cash flow conversion in the past five years has been 75%, resulting in the balance-sheet moving from being net-debt to net-cash.

IIFL Securities says that there is a strong possibility of rise in dividend pay-out, given that the business has transformed into a cash-generating one. Notwithstanding tractor cycles, Escorts has the potential to trade at higher valuations, it added.