Escorts Ltd’s December quarter results (Q3FY22) aren’t particularly exciting, but they aren’t bad either. Standalone revenue fell 3% yoy (YoY) to approximately Rs.1958 crore. Cash flows were hit by late monsoon rains and delayed harvesting of kharif crops, leading to a slump in rural demand in the third quarter. This means that the quantity of tractors and construction equipment has declined. However, this was partially offset by higher prices and favorable mix.
While the domestic tractor industry declined 13.5% year-on-year, Escorts saw a massive 22.4% year-on-year decline in its domestic tractor volumes. Thus, growth in export volumes and 13.5 per cent growth in net receipts limited the decline in Quarter 3 tractor revenue by 9% yoy to Rs 1505.6 crore.
Analysts at Sharekhan said in a report, “Due to new product development, increasing share of business with Kubota Corporation (Japan) and focus on distribution network, exports and volumes of 40HP+ tractors continue to outperform other sectors. ” Note that the domestic tractor market share of Escorts has grown sequentially.
Meanwhile, revenue from the construction equipment business and railway products division grew nearly 13% year-on-year and 48% year-on-year to Rs 276 crore and Rs 174 crore in the third quarter.
Total earnings before interest, taxes, depreciation and amortization (Ebitda) margin declined 450 basis points (bps) to 13.5% due to headwinds in the form of raw material cost inflation. One basis point is 0.01%. Management expects a further increase in raw material prices in the fourth quarter of FY22.
Management also expects improvement in tractor volumes due to stronger agro-economic factors. FY22 industry volumes are projected to decline 4-6%. According to Motilal Oswal Financial Services, “However, the volume decline may not be sharp as -a) agro-economic indicators and agri-level sentiment are still positive, and b) weakening by improvement in non-farm applications. Agriculture segment. We estimate that the tractor industry volume will witness a decline of 3% CAGR in FY 2011-24E.”
Furthermore, the partnership with Kubota, a global leader in agriculture and construction equipment, will accelerate Escorts’ process of becoming one of the leading players in the farm equipment sector. Analysts at Sharekhan said, “We expect the company’s earnings to grow marginally in the medium term, although free cash flow will be good given the strong balance sheet. The company expects Rs 1,872 crore through preferential allotment to Kubota Corporation to further strengthen the balance sheet.
With the shift towards sustainable alternatives in the industry, the company is optimistic about electrification in tractors. Since diesel accounts for 60-70% of the operating cost in tractors, electrification in this segment would be favorable as electricity is subsidized for farmers. Currently, it is trial-marketing its electric tractors (in the 25HP range) in the US and EU markets.
Over the past six months, Escorts shares have risen more than 50%, indicating that investors are incorporating a good bit of optimism into the prices.
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