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Chola Securities
Escorts (Market Performer)
CMP: ₹460.2
Target: ₹500
In Q1 FY20, Escorts’ revenue declined by 5.8 per cent y-o-y to ₹1,420 crore on account of a 14.1 per cent/20.7 per cent y-o-y volume decline in the tractor/construction segment. Agri-machinery segment reported revenues of ₹1,090 crore and an EBIT margin of 10.9 per cent, down by 326 bps y-o-y.
Construction equipment segment grew by 13.7 per cent y-o-y with revenues of ₹212 crore. Volumes declined sharply by 20.7 per cent y-o-y (-26.7 per cent q-o-q) on account of slowdown in financing. The EBIT margins in this segment stood at 2.5 per cent up by 13 bps y-o-y and a decline of 456 bps q-o-q. The management expects the construction equipment segment to recover in 2HFY20E and deliver a flat growth for FY20E.
Valuation: The low reservoir levels in Maharashtra and the south will continue to impact volumes. Going forward, we expect FY20 volume growth and profitability to remain under pressure. Progress of the monsoons, particularly in the south would be a key factor to monitor.
At CMP, the stock is trading at P/E of 11.7X/10.4x on FY20E/FY21E EPS, respectively. We arrive at a revised price target of ₹500 based on P/E of 11x FY21EPS and maintain a ‘Market Performer’ rating on the stock.
Risks: Slow pace in infrastructure spending, unfavourable weather conditions.
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