Recommendation From Commercial Vehicles Sectors

This column gives you scrip chosen by the research team during the fortnight that is fundamentally strong and expected to give good capital appreciation over a time period of 1 year

Escorts Limited 

REAPING THE BENEFITS OF AGRI-INFRA PUSH 

HERE IS WHY
Strong Q3 numbers
Expansion in margin through new launches
Government’s push to drive demand of tractors 

Escorts Limited (EL), incorporated in 1944, is an engineering company, which offers agricultural tractors and construction equipment. The company manufactures and markets equipments such as cranes, loaders, vibratory rollers and forklifts. The company is also among the world’s largest pick-n-carry hydraulic mobile crane manufacturer. The company's segments are agri-machinery, auto ancillary products, railway equipments, construction equipments and others. 

EL is the third largest agricultural tractor manufacturer in India having strong presence in the northern and western markets and an overall market share of 11 per cent in FY17. The company plans to increase it to 15 per cent in the next four to five years. The government’s encouragement to farm mechanisation and its target of doubling the agricultural growth is expected to drive the demand for tractors. 

In the December quarter, the company witnessed 11 per cent volume growth in the tractor business, which was driven by sales from UP, MP and other northern states. The revenue from construction equipment business grew by 26 per cent due to increase in road infrastructure spending, whereas the railway business grew by 30 per cent due to higher order inflow. The company’s management has indicated a 15 to 20 per cent CAGR growth in railway business in the next three years. The company’s order book size at the end of December quarter was about Rs330 crore, which will get executed over the next 12 months 

On the financial front, the net sales of the company increased 10.26 per cent to Rs1205.03 crore in the third quarter of FY18, as against Rs1092.93 crore in the same quarter of the previous year. The company’s PBDT increased 59.56 per cent to Rs147.42 crore in the third quarter of FY18 on a yearly basis. The company’s net profit increased exceptionally by 305.03 per cent in the December quarter to Rs91.98 crore, as against Rs22.71 crore in the same period last year. The company’s EBITDA margins expanded 350 bps YoY on the back of higher sales, price hike, cost control initiatives and better tax offset under GST. 

On an annual basis, the company’s net sales increased 20.03 per cent to Rs4167.58 crore in FY17 on a year-onyear basis. The company’s PBDT increased 123.61 per cent to Rs339.84 crore in FY17, as against Rs151.98 crore in the previous fiscal. The net profit of the company soared 79.50 per cent to Rs160.84 crore in FY17, as against Rs89.38 crore in the previous fiscal. On the valuation front, the company has a PE ratio of 36.33x as against its peer Endurance Technologies (50.81x) and Wabco India (59.49x). The company’s return on equity (RoE) and return on capital employed (RoCE) stood at 9.70 per cent and 12.23 per cent, respectively. The company has reduced debt and is virtually debt-free. 

We expect expansion in margins through launch of new products and initiatives taken by the company to reduce costs. Also, the government support for better agricultural output is expected to trigger growth. We recommend our reader-investors to BUY the stock