Impossible to pass on 100% price increase – Escorts

 Update on the Indian Equity Market:

On Tuesday, Nifty closed in the green at 15,108 (+1.2%). Among the sectoral indices, Auto (+3.2%), Media (+1.7%), and Metal (+1.7%) closed higher. PSU Bank (-1.3%), Pharma (-0.2%), and FMCG (-0.2%) closed in the red. M&M (+5.8%), Bajaj Auto (+5.2%), and Titan (+5.0%) were the top gainers. Bharti Airtel (-2.3%), ITC (-1.1%), and Coal India (-0.9%) were among the top losers.

Excerpts of an interview of Mr. Bharat Madan, Group CFO, Escorts Ltd with CNBC-TV18 dated 17^th May 2021:

• Speaking about the impact on demand, Mr. Bharat Madan said the impact of the 2nd wave is serious.
• On the rural side, things are better as compared to urban. The rural segment is expected to do well led by pent-up demand.
• Sowing starts from mid of May and goes on till July, farmers don’t require tractors for sowing. He said even if the situation normalizes in June then demand would be back for tractors.
• The channels have opened, but rising infection level is impacting the demand.
• For FY22E, the situation is dynamic and depends on how the month of June shapes up.
• Speaking about commodity prices, he said the raw material prices witnessed steep inflation of ~7-8%. The company passed 2 price increases of about ~4-5%.
• There is further pressure in 1QFY22E, and passing 100% price hikes is not possible considering the current demand situation.
• The company will take another price hike in Q1FY22E.
• Speaking on exports, he said the JV has started producing tractors (Kubota tractors). The JV will start producing tractors with the Escorts brand from 2QFY22E.
• The new JV will add a capacity of 30,000 units.
• The exports have shown 30% volume growth in the last few weeks. The exports will a focus area going ahead.

Asset Multiplier comments:

• We believe rising raw material prices will impact EBITDA margins in the near term, and it will be difficult to pass on the entire cost to the customers.
• We also believe rural India is less affected as compared to urban areas and a good monsoon along will government measures might bring back the demand for tractors if the situation normalizes by May end.

Consensus Estimate: (Source: market screener website and Investing.com websites)

• The closing price of Escorts Ltd was ₹ 1,178 as of 18-May 2021.  It traded at 15x/12x the consensus Earnings per share estimate of ₹ 81.2/94.9 for FY22E/FY23E respectively.
• The consensus average target price is ₹ 1,452/- which implies a PE multiple of 15x on FY23E EPS of 94.9/-.

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.”