Buy Escorts, target price Rs 815: Emkay Global

Emkay Global has retained buy on Escorts Ltd, with a target price of Rs 815 (Rs 954 earlier), based on 14 times FY22E EPS (unchanged). The brokerage has reduced the EPS estimates of the company by 18%/15% for FY21E/F22E to factor in near-term volume pressures.

ESC is a play on the tractor segment, which is expected to recover sooner than others, owing to healthy rabi output and expectations of good monsoon in 2020.

The share price of the company moved up by 4.47% from its previous close of Rs 714.30. The last traded price is Rs 746.20. Incorporated in 1944, Escorts has a market cap of Rs 9135.65 crore.


Investment Rationale

The brokerage expects Escorts to sustain market share in domestic tractors going ahead, led by continuation of aggressive marketing efforts, success of its dual-brand strategy – Farmtrac and Powertrac series, and focus on network expansion.

Recently, the company has strengthened its tie-up with Kubota Japan, which took a 10% equity stake in Escorts. Escorts will benefit over the medium term by this partnership, in terms of technology collaboration, component supplies to meet Kubota’s global requirements and utilization of Kubota’s global sales network for exports.
The brokerage expects revenue growth of 6% CAGR and earnings growth of 14% CAGR over FY20-22E, driven by growth in both tractor and railway segments.

Financials

For the quarter ended December 31, 2019, the company reported consolidated sales of Rs 1650.22 crore, up 23.73 % from last quarter sales of Rs 1333.77 crore and down -1.27 % from last year's same quarter sales of Rs 1671.42 crore. The company reported net profit after tax of Rs 153.70 crore in the latest quarter.