The agricultural and construction machinery maker Escorts’ share price is Rs 1281 today, an increase of Rs 10, or 0.8%. IIFL Securities is initiating coverage for escorts with an ADD rating and a price target of Rs 1470. The tractor industry, which saw exceptional volume growth of> 25% in FY21, could continue to grow in FY22, albeit at a lower rate. However, industry profitability (% margin and EBIT / tractor) may deteriorate in FY22 due to several factors. As a result, earnings growth in the tractor industry is likely to be subdued.
According to IIFL Securities, Escorts expects outperformance with market share gains in domestic tractors and high export growth. IIFL Securities found that escorts’ improved margins, yield ratios and cash flows have been underestimated by the market. Non-agricultural businesses and working with Kubota can improve long-term growth prospects.
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Technical analysis on escorts:
Avinash Gorakshkar, Director Research at ProfitMart Securities, said that the escort price has only been consolidating Rs 1200 – Rs 1400 for the past 2 months and does not do much but forms a nice flag pattern weekly in the process. It also has cloud support. The support level is Rs 1200 – Rs 1180, below which stop loss is executed. He expects the stock to find support at this level and to consolidate further. Seen above just over Rs 1400, says Avinash
According to IIFL Securities, escorts outperformed the industry in FY 16-21, with market share gains in the South and West Indies, where escorts have traditionally been weak. IIFL Securities also expects Escorts to see high export growth, aided by sales of e-Kubota tractors through Kubota’s worldwide sales. Overall, Escorts’ tractor volume is expected to grow 14% in FY22 versus 10% in the industry. If escorts gain a foothold in the non-farm segments (construction machinery and railways) it would add to overall growth.
According to IIFL Securities, Escorts has seen significant improvements in margins, rate of return, and cash flows over the years (even before Fiscal Year 21). RoCE (excluding cash) has improved from single digits compared to FY11-16 to 50% in FY21. The average free cash flow conversion over the past five years was 75%, which resulted in the balance sheet shifting from net debt to net cash.
According to IIFL Securities, there is a strong likelihood of an increase in the dividend payout as the business has turned into a cash generating business. Despite tractor cycles, Escorts have the potential to trade with higher ratings, he added.