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Escorts: Keep ‘impartial’ as positives are largely priced in

We’re improving EPS for Fiscal Year 21E by ~ 5%, taking into account volume and margin upgrades, but retaining the EPS estimates for Fiscal Year 22E / 23E.

Escorts (ESC) performance in the third quarter of FY21 was consistent with strong profitability and PAT growth of over 80%. This was spearheaded by strong tractor volumes, cheap mix and cost reduction initiatives. While the demand outlook remains strong, the challenges in the supply chain are easing. Other companies are also showing signs of recovery. We’re improving EPS for Fiscal Year 21E by ~ 5%, taking into account volume and margin upgrades, but retaining the EPS estimates for Fiscal Year 22E / 23E. We are maintaining our neutral rating as the positive results are largely factored in.

A better mix, lower marketing and other costs support the margins. ESC’s revenue / EBITDA / PAT increased by 23.5% / 71.5% / 83.4% year-on-year to ~ INR 20.1 billion / INR 3.6 billion / 2 in the third quarter of fiscal year 21 .8 billion INR. Revenue / EBITDA / PAT in the 9MFY21 increased by 7.7% / 63% / 70.2% year-on-year to INR 47.1 billion / INR 7.8 billion / INR 6 billion. The tractor volume increased by ~ 26% year on year. Net sales improved year-on-year by 1.8% to 523.6 thousand INR (v / s approx. 543.7 thousand INR) due to a price increase (2% in November 20) and a favorable mix (> 40 hp Contribution at 60% v / s <50% in the 3rd quarter of the financial year 20)). Tractor sales grew 28% year-on-year, railways 6% and CE 13%. The EBITDA margins rose year-on-year by ~ 500 basis points (-30 basis points compared to the previous quarter) to 18% (v / s approx. 17.6%), which is due to a better mix and savings at all cost heads (RM: 120 Year-on-year basis points, employees: 140 basis points year-on-year, other costs: 250 basis points)). The decrease in margins in QoQ reflects a negative mix and RM cost inflation. The PBIT margins for tractors improved by ~ 560 basis points year-on-year (+10 basis points compared to the previous quarter) to 20.1%. The railways PBIT margins fell to 12.7% (-570 basis points year-on-year) due to the higher share of a new product. The CE-PBIT margins were 7.5% (+ 270 basis points year-on-year).

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Outlook for tractor. With a strong Rabi season (good sowing and higher MSPs) the outlook for Q4 is very good. While the pent-up demand is more or less over, all indicators of agricultural ecosystems are positive and therefore growth should continue. In addition, non-agricultural use of tractors (25–35% of sales), which has not yet been revived, could support demand for tractors in FY22. In the 9MFY21, it had reached half of normal sales.

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