A better-than-expected June quarter performance and expectations of steady growth for FY21 led to the 2.2 per cent gain for the Escorts stock. The outperformance was due to a better product mix and lower expenses which resulted in higher realisations and margin expansions. The gains on the operating front came despite the 14 per cent year-on-year fall in tractor volumes. Agri machinery (tractors) is the largest of the three segments Escorts is in and accounts for 80 per cent of its revenues.
Operating profit margins expanded by 130 basis points year-on-year to 11 per cent as compared to street estimates of about 9 per cent. The gains were on account of lower commodity costs and higher share of tractors in the 40 horsepower and above segment which fetch better margins. What added to the profitability was lower discounts and other expenses. The lockdown resulted in a fall in marketing and general administration spends.
While tractor segment margins improved 355 basis points YoY to 14.5 per cent, margins in the railway segment was down sharply to 2.6 per cent from 20 per cent. The construction equipment segment reported a loss at the operating level; the company expects volumes in the segment to improve in the second half of the current financial year. Escorts is looking at bringing down its fixed costs by up to 15 per cent this year.
What could play spoilsport going ahead are supply side issues for the tractor segment. The company is operating at 50-60 per cent capacity due to supply disruptions related to fuel injection systems from Bosch. The issues are likely to be resolved over the next three weeks. The company expects the tractor sector to grow by low single digits for FY21, which given the double digit decline in the first quarter would translate to 10 per cent growth for the rest of the year.
The growth in tractor volume estimates is based on a strong rabi season, steady kharif sowing, normal monsoons and improvement in availability of finance. In addition to market share gains led by new product launches, triggers for the stock include the partnership with Japan’s Kubota, which should help it improve its competitive positioning in tractors and construction equipment in the Indian market and expand its presence in export markets, say analysts at Motilal Oswal Financial Services. While brokerages have revised their earnings estimates upwards, most of the gains are already factored in the price. The stock is trading at a 25 per cent premium to its 5-year average of 12.5 times its price to earnings ratio.