Escorts’ EBITDA for the third quarter of FY21 was roughly in line with estimates at Rs.3.6 billion (+ 18%, -30 basis points from the previous quarter). The tractor industry continues to have healthy growth prospects supported by a good Rabi harvest and continued government support. HDFC Securities retains the ADD rating with a price target of Rs 1480 at 16x GJ23E EPS. The estimates for HDFC Securities FY22 / 23E remain broadly unchanged. We recommend accumulating the stock on declines.
Escorts Q3 FY21 Finance:
(1) The tractor volume at 31.5,000 units increased by 26/29% year-on-year. The average realization at Rs 639k decreased by 2/5% due to a change in the mix (Powertrac’s share increased and sales of tractors under 40hp in the mix increased as demand for commercial tractors rose again).
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(2) Sales of Rs.20.1 billion increased 23.5% year over year. The company posted an EBITDA margin of 18.0% (-30 basis points qoq, + 510 basis points yoy) due to a better product mix and better leverage
(3) The EBIT margin of the Agri / RED segment was 20 / 12.7%. ECM sales of Rs 2.44 billion increased 13/56% year over year. EBIT margin at 7.5% (compared to 4.8 / 1.7%)
(4) Escorts PAT at Rs 2.81 billion grew 83/22% YoY.
Escorts key highlights:
(1) Strong retail stores: Management emphasized that retail dynamics are strong and supported by higher levels of production. While most players have increased their inventory levels, the industry’s inventory levels remain below pre-Covid levels.
(2) Pressure on raw material costs: In the fourth quarter of fiscal year 21, margins will be affected by an escalation of input costs of 5%, against which the company increased prices by 2% in November 20. Escorts plans another price hike in the early first quarter of fiscal 22nd.
(3) Railway segment: The company has an order backlog of Rs 3.3 billion with a lead time of 6-8 months. In fiscal year 21, rail revenues remained unchanged year on year. The tender process will return to pre-COVID levels by the end of the fourth quarter of fiscal year 21. As the Indian government continues its commitment to IR, management is confident that this segment can grow over the long term.
(4) Construction machinery: The segment volume increased year-on-year by 20/53% to 1254 units. This segment is expected to grow as the government focuses on infrastructure.