Expecting highest numbers in 3QFY21 – Escorts

Update on the Indian Equity market:
On Monday, the Indian equity markets witnessed the biggest single-day decline in seven months as investors were worried due to the spread of a new strain of the Covid-19 in parts of the UK. The Nifty50 ended the day at 13,328 (-3.1%). While none of the sectoral indices ended with gains, PSU BANK (-6.9%), MEDIA (-6.2%), and METAL (-5.5%) led the losers. Among the Nifty50, none of the stocks ended in the green, and TATAMOTORS (-9.5%), ONGC (-9.4%), and GAIL (-8.4%) led those that ended in the red.

Excerpts of an interview of Mr. Bharat Madan, Group CFO, Escorts with CNBC TV18 on 18th December 2020:
• In the last 2months, demand was quite good due to the festive season in October and November. In October, the industry growth was close to 7-8 percent and in November the growth was much higher. He expects channel filing to happen in December. Though the retail numbers may not be as strong as in the festive months, he expects this quarter to deliver one of the highest numbers the industry would have ever done.
• Talking about guidance for FY21E, he said the overall industry growth in 8months of FY21E is about 15% and expects mid-teens growth for the company.
• There were some supply issues due to the farm protests but the company has been able to manage the supply.
• The demand for their products comes majorly from the states of UP, Bihar, Rajasthan, Maharashtra, Telangana and Andhra Pradesh. He doesn’t foresee any major demand problems due to the ongoing farm protests.
• In Punjab and Haryana, farmers shift to tractors with higher horsepower (HP) but the volumes are stagnant.
• Talking about input prices, Escorts has taken a price increase after the festive season to pass on the inflation. There could be another price increase in the next quarter. Despite passing on the increased raw material price to consumers, this still impacts margins.
• Supplies from Kubota joint venture (JV) have begun, and he expects export orders to pick up.
• The target for exports for FY21E is 4000-4500 tractors but there are some challenges from container supplies causing delays in orders.
• He expects margins in 3QFY21 to be at the same level as 2QFY21. The impact of cost increases will get neutralized due to the operating leverage from higher volumes.

Consensus Estimate: (Source: market screener and investing.com websites)
• The closing price of ESCORTS was ₹ 1,242/- as of 21-December-2020. It traded at 19x/ 17x/ 15x the consensus earnings estimate of ₹ 66/ 74/ 85 per share for FY21E/FY22E/FY23E respectively.
• The consensus target price of ₹ 1,257 implies a PE multiple of 15x on FY23E EPS of ₹ 85/-.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”