Buy Escorts, target price Rs 950: HDFC Securities

HDFC Securities has initiated coverage on Escorts with a buy rating at a target price of Rs 950 based on 15 times FY22E EPS.

According to the brokerage, the domestic tractor OEM will benefit from the equity investment by Japan’s leading tractor major Kubota. The partnership will provide new growth avenues for Escorts across product segments (including mechanised equipment) as well as geographies (new export markets as well as manufacturing base for Kubota’s international operations). Further, the government is rolling out structural reforms in the agricultural segment, which will enhance farm incomes. These initiatives will promote mechanisation of agriculture.

Investment Rationale


The brokerage values the stock at a 15 per cent premium to the last five year average trading multiple. It believes the equity infusion by Kubota will strengthen the balance sheet and will provide multiple growth avenues for Escorts – both in India as well as internationally.

Key risks: Any delay in implementation of reforms by the government, delays in fund infusion by Kubota/material changes in the arrangement between the two partners.

Financials

For the quarter ended March 31, 2020, the company reported consolidated sales of Rs 1385.65 crore, down -16.03 per cent from last quarter sales of Rs 1650.22 crore and down -15.97 per cent from last year's same quarter sales of Rs 1649.08 crore. The company reported net profit after tax of Rs 129.22 crore in the latest quarter.

Promoter/FII Holdings

Promoters held 40.25 per cent stake in the company as of March 31, 2020, while FIIs held 19.28 per cent, DIIs 9.94 per cent and public and others 30.5 per cent.