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Rakesh Jhunjhunwala shares: Escorts in Huge Bull’s rural theme

Rakesh Jhunjhunwala holds 64 lk (4.75% stake) in escorts valued at Rs 880 cr. Jhunjhunwala cut 0.9 stake in escorts in the last quarter. Tractor sales have been robust and the Big Bull says the government is focused on improving living standards in rural areas and the Agri theme, which is based on this stock of the automotive sector, will benefit escorts from now on. Rakesh Jhunjhunwala saw the market cap of escorts rise to over Rs 18,500 cr. The 52-week low for Escorts is Rs 526 while the 52-week high is Rs 1468. Today’s Escorts share price is Rs 1365, down Rs 14 or 1%.

According to ICICI Securities, Escorts reported robust results for the third quarter of FY21.Total operating income for the third quarter of FY21 was Rs 2017 cr, an increase of 23.5% year over year and a 25% increase in tractor volume .7% year-on-year to 31562 units. Within the segments, gross tractor sales were Rs.1653 billion (up 28% year-over-year), while construction machinery (CE) sales rose 13% year-over-year to Rs 245 billion, and the Railway Equipment (RED) division was one Revenue declined 5.7% year over year to Rs 117 billion. EBITDA margins were 18% (down 30 basis points from the previous quarter), with savings in staff and other expenses nearly negating the decline in gross margin . The resulting standalone PAT for the third quarter of FY21 was Rs.280.6 billion, up 83.3% year over year.

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Escorts topline performance should stay healthy in the medium term:

The domestic tractor industry continues to outperform the rest of the automotive industry due to continued supportive tailwinds in the form of record harvest procurement, crop prices, and government engagement to increase farm incomes and rural infrastructure. Escorts expects healthy growth dynamics for the business year 21E, which will continue. The upcoming Rabi season will be as strong as the previous Kharif season.

In the case of tractors, it can be noted that construction demand will show a sharp decline in the coming quarters due to the pent-up clearance (currently half of the usual 25-35% of the total mix). ICICI Securities is building a tractor volume of 10% CAGR in fiscal year 21E-23E. The CE department has benefited in recent months from an improvement in infrastructure, mining and construction activities as well as from a renewed push towards infrastructure in the latest Union budget. The RED order book of> Rs 330 cr is expected to be executed in six to eight months. Post-FY 21E performance is expected to return to pre-Covid levels once bidding activity for new rail contracts normalizes.

Escort rating & outlook:

PAT CAGR sales in fiscal year 21E-23E are 15% and 11%, respectively.

Escorts believe that the current reviews adequately capture the topline growth prospects and are waiting for:

(a) Sign of Decrease in Margin
(b) Fixed plans to use cash before going positive again

ICICI Securities maintains the HOLD rating for escorts and rates it on a SOTP basis at Rs 1500 (unchanged from the previous price target; allocation of 17 times the P / E to the core 23E EPS and a 25% discount from the holding company on its own Shares.