With industry tractor sales expected to hit a record high in FY18, Escorts, which earns 80 per cent of its revenues from its tractor business and holds 11 per cent market share, is expected to be among key beneficiaries of this improved demand. The industry tractor sales estimated at 0.65 million in the current fiscal — well past the previous record high of 0.634 million achieved in FY14.
It is not a surprise that brokerages continue to be bullish on the prospects of the Escorts stock, which has gained about 21 per cent in one month and has more than doubled over the one year period. Analysts at HSBC believe that the company is well-positioned to benefit from the improved demand, supported by favourable monsoons in 2017 and structural demand drivers like increasing farm mechanisation and improving farming incomes.
They expect the company’s tractor volumes to rise at an annual rate of 10 per cent over the FY17-20 period, outperforming the sector growth rate.
The near-term trigger will be the December quarter earnings, which will be led by 12 per cent tractor volume growth to be just under 19,000 units. Higher sales are coming from a slew of new products Escorts has launched as well as expansion into areas where it is weak.
While volume gains help, new products lead to an improvement in margins given a tilt towards higher-powered products in the 41-50 horsepower range, which are most in demand.
The company is also looking at improving the market share by revamping its dealer strategy in west and south regions. In these two regions, its market share is around the 5 per cent mark, while in north, central and east regions, its share is upwards of 10 per cent.
Further, it is focussing on the exports market with higher horsepower products, and aims to increase its international volumes by 10 times by FY22 from 1,000 units in FY17. The volume growth and improvement in product mix for the export segment should also reflect positively on Escorts profitability.
The other factors which should improve margins are lower costs from vendor, manpower and raw material rationalisation.
Scale up of its railways and construction equipment businesses should also rub off positively on earnings. Increased allocation for infrastructure investment by the government will only enhance prospects of these businesses. Overall, margins are expected to improve from 7.5 per cent in FY17 to about 11 per cent in FY20.
At the current price, the stock is trading at 18 times its FY19 earnings estimates. Investors with a two-three year time frame can consider it.