We recommend ?BUY? on ESCORTS LTD for a target of INR 634 – valuing the company at P/E 15.5x of FY20E Earning.
CMP:? ? ? ? ? ? ? ? ? INR 558
Target Price:? ? ?INR 634
Investment Rationale:
Escorts Limited, one of India?s leading engineering companies, is a leader in farming and construction equipment manufacturing.
Focusing on exports and on improving market share in tractors
Tractor exports from India to grew by 6-8% CAGR, and expected to achieve 8,000 to 10,000 volume by FY22.
Expected to gain 15-16% market share by FY22 from 11% in FY18
Currently 900+ active dealers and expanding fast
Construction equipment and railways businesses on a strong footing
Constant addition of products to its range would lead to strong sales growth.
Valuations And View:
Escorts on of India?s leading engineering conglomerates having presence in the high growth sectors of Agri-machinery, Construction & Material handling equipment and Railway equipment over last six decades. We value the business at 15.5x FY20E EPS and recommend a BUY rating on the stock with a target price of INR 634 per share.
Risk & Concerns
Industry and Market: The Domestic Agri Industry is dependence on monsoon and farmer?s spending behaviour. Any subdued demand will impact the volume of the company adversely.
High Input Cost: Increase in raw material may adversely affect the operating margin of the company.
Competition: The Engineering & equipment Market has multi-players and the competitive landscape has become much more dynamic.
Company Background
Escorts Ltd is one of India’s leading engineering conglomerates with over six decades of experience. The company has diversified business in three different segments viz. Agri Machinery Material Handling & Construction Equipment and Railway Equipment.Escorts Ltd was incorporated in the year 1944 as Escorts Agents Ltd in Lahore. In the year 1951 Escorts established India’s first private Institute of Farm Mechanisation at Delhi and in the year 1953 Escorts (Agents) Ltd and Escorts (Agriculture and Machines) Ltd merged to form Escorts Agents Pvt Ltd. The company was converted into a public limited company in December 1959 and subsequently the name was changed to Escorts Ltd in January 1960.
Businesses The Company’s segments are Agri Machinery, Auto Ancillary Products, Railway Equipment, Construction Equipments and Others. It is engaged in the business of manufacturing of engines for agricultural tractors, earth moving and material handling equipment, round and flat tubes, heating elements, double acting hydraulic shock absorbers for railways coaches, center buffer couplers, automobile shock absorbers, telescopic front fork and Mcpherson struts, brake block, internal combustion engine and various types of brake used by railways. It also trades in oils and lubricants, implements, trailers, tractors, compressor accessories and spares, construction and aero business. It offers Euro Series under Powertrac; Classic Series in 41-50 HP under Farmtrac brand, and FT 6055 Xtra Torque Tractor with approximately 20 speed transmission.
Products
Agri Machinery
Auto Ancillary Products
Railway Equipment
Construction Equipments
Industry Overview
Agriculture: India has grown from an agricultural importer to be a surplus producer of food grains, through a favourable interplay of infrastructure, technology and policy support. Central Statistics Office (CSO)?s 2017-18 third advance estimates place total food grain production at 279.51 million tonnes, at par with the record-breaking production of 275.11 million tonnes in FY 2016-17. The agricultural sector employs more than half of the nation?s total workforce and contributes to 17-18% of the GDP. However, policymakers recognise that with increasing scarcity of natural resources, progress in agriculture, today, can only be achieved through an increase in productivity.
Tractors: India is the largest manufacturer of farm equipment, including tractors. The country?s tractor industry accounts for almost one-third of the global pie. The domestic tractor industry grew by 22.2%, in volume terms, to 7.09 lakh units in FY 2017-18, vis-?-vis 5.80 lakh units in FY 2016-17. The sector is projected to produce 12-15 lakh units by 2030 [Source: India Brand Equity Foundation]. Construction Equipment: The total construction equipment industry grew by 27% in FY 2017-18. Major segments like earth-moving, material handling and road construction, reported positive movements. The served segments of backhoe loaders, Pick and Carry (PnC) cranes and compactors rose by 31.3 % in FY 2017-18. Material handling has emerged as the biggest gainer, with 82% growth, followed by backhoe loaders at 26% and compactors at 16%. The overall construction equipment sector is projected to grow by 16-18% in long-term. Expanding infrastructure investment, growing private sector involvement and progress in the real estate sector drive industry growth.
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