Target: ₹1,575

CMP: ₹1,831.60

Unabsorbed material price inflation - steel; tires; casting etc - coupled with adverse product mix resulted in Escorts Kubota posting EBIT margin of 8.3 per cent in Q3, though flat QoQ but sharply down from 15.5 per cent in Q3 of previous fiscal.

Despite its tractors volumes now making a comeback after declining last fiscal, Escorts’s published well-nigh 40 per cent drop in its agri-machinery business EBIT to ₹144.77 crs last quarter from ₹238.66 crs in the same period a year back.

The stock currently trades at 32.4x FY23e EPS of ₹57.29 and 23.6x FY24e EPS of ₹78.74. With unexpected surge in raw material prices over the last few quarters, EKL’s has seen no timid erosion in margins in agri-machinery business - EBIT margin 9M-FY23 9.1 per cent vs 15.3 per cent, resulting in some 19 per cent cut in earning estimates for next fiscal.

Though amalgamation of Kubota JVs (Escorts Kubota Ltd, Pvt Ltd, and Kubota Agricultural Machinery India Pvt Ltd) would galvanise EKL’s tractor market share by 3-4 per cent, further gains could face no small friction due to barely fledgling stage of Indian tractor industry.

Weighing odds, we assign “reduce” rating on the stock with revised target of ₹1,575 (previous target: ₹1,550) based on 20x FY24 earnings