Sample  Research Report  
 Escorts   
Vol. No. : 14    Issue No. : 3                             Wednesday, July 01, 2015

Fortunes set to turnaround

Good monsoon and pick-up in infra investment augur well for the company’s prospects

Related Tables
4Escorts: Financials
4Escorts: Results
4Escorts: Segment results

Buy Escorts
BSE Code 500495
BSE Group A
NSE Code ESCORTS
ISIN Demat INE042A01014
Bloomberg ESC@IN
Reuters ESCO.BO
Par Value Rs 10
52-week High/Low Rs 174 / Rs 102
Current Price Rs 124 (as on 1st July 2015)

Besides tractors, Escorts is also a leading player in construction equipment, railway equipment and auto components.

Having pioneered farm mechanization in the country, Escorts has played a pivotal role in the agricultural growth of India for over five decades. One of the leading tractor manufacturers of the country, Escorts offers a comprehensive range of tractors, more than 45 variants starting from 25 to 80 HP. Escort, Farmtrac and Powertrac are the widely accepted and preferred brands of tractors from the house of Escorts.

A leading material handling and construction equipment manufacturer, Escorts also manufactures and market a diverse range of equipment like cranes, loaders, vibratory rollers and forklifts. Today Escorts is the world's largest Pick 'n' Carry Hydraulic Mobile Crane manufacturer.

Escorts has been a major player in the railway equipment business in India for nearly five decades. Its product offering includes brakes, couplers, shock absorbers, rail fastening systems, composite brake blocks and vulcanized rubber parts.

In the auto components segment, Escorts is a leading manufacturer of auto suspension products including shock absorbers and telescopic front forks.

Over a million tractors and over 16,000 construction and material handling equipment have rolled out from the facilities of Escorts.

Focusing on IT to improve its productivity

Escorts announced a strategic relationship with the US-based IT major Cognizant to modernize its technology landscape and achieve the company's vision of digitally transforming its businesses to deliver innovative products, provide superior customer experience, and drive growth. This multi-year, multi-million dollar engagement spans all of Escorts businesses, including agri machinery, material handling and construction equipment, railway equipment and auto components.

Cognizant will enable Escorts to improve control and collaboration across its value chain by mobile-enabling its workforce and integrating multiple systems used by vendors, sales partners, and customers. This will help Escorts continuously improve product quality and offer a broad range of customized, configurable, and value-added products and services, strengthening existing customer relationships and building new ones.

Cognizant will set up a transformation office to help Escorts embrace adaptive production lines and demand-based manufacturing practices, and develop new digital capabilities in areas such as mobility, analytics, cloud, telematics, and machine-to-machine communication. Complementing traditional channels with new digital ones, Escorts will be able to better align manufacturing and business strategies, and expand into newer geographies. By enabling connected worksites, remote product monitoring and diagnostics, and platform-based governance, Escorts will be able to harness and analyze real-time data from multiple sources for improved customer insight, decision-making, and productivity.

Helds on to its sales in FY 2015 despite tough conditions

In FY 2015, sales fell 6% to Rs 3985.83 crore. OPM fell from 6.4% to 4.0% which saw OP falling 41% to 161.40 crore.

PBT fell 52% to Rs 98.88 crore and EO loss stood at Rs 30.63 crore against a profit of Rs 3.79 crore. Thus PBT after EO fell 67%to Rs 68.25 crore. .

Write back of tax stood at Rs 6.46 crore against a provision of Rs 30.66 crore after which PAT fell 58% to Rs 74.71 crore.

On its future strategy Nikhil Nanda, Managing Director informed "Despite the tough market conditions, we are continuously enhancing the product proposition for our customers. In line with our strategy, significant efforts are made in fiscal 2015 to introduce new products, drive innovation and increase market coverage. We have more than doubled our exports in tractors. We have seen a positive momentum in the higher HP segment in the tractors business. In Escorts Construction Equipment & Escorts Auto Products we have started making considerable progress in curtailing our losses. In the next fiscal, we expect further strengthening of the construction equipment, railways and auto products business. In tractors, we will continue to strengthen our premium offerings and market world class products in India and abroad. We are also opening up new market segments by manufacturing specialty tractors. Apart from that, we have undertaken internal restructuring by reducing headcount through a successful VRS."

Rajan Nanda, Chairman and Managing Director said, "The tractor industry has now been impacted for three consecutive quarters by adverse weather conditions. Poor and delayed monsoons have been followed by unseasonal rain that has affected standing crops. This has now happened for two years in a row. It is important for the government to find ways to protect the farmer through a strong and effective crop insurance regime as well as further easing of loans for seeds and inputs. Though government policies aims to support infrastructure and construction business we anticipate the industry will continue to face challenges and any recovery is expected towards the second half of this fiscal. We have seen improvement in the Railways business as the government has started clearing logjams that had slowed the process of modernization."

Outlook for most of its business segments should improve in future

Escorts Agri Machinery: Due to poor and uneven monsoon, Tractor sales crashed in second half of FY 2015 and the fall continues till June 2015. However this year monsoon has been very good in June 2015 and as per Skymet it is expected to be normal for rest of the monsoon months also. This should trigger a major revival in demand for tractors from second half of FY 2016 especially on a very low base.

Escorts Construction Equipment: After the construction industry went thru a rough phase in past couple of years, a moderate turnaround is expected on the back of various policy developments which have transpired as the new government took the charge. The importance of infrastructure for sustained economic development is now fully recognized and emphasised. With improving macro environment and clearance of various policy and procedural bottlenecks, construction industry and in turn construction equipment industry should post a good recovery from FY 2017.

Projects are lined up for infrastructure development especially in sectors like metro, roads, power, steel and logistics, which will create a huge demand for construction equipment in the country.

For a faster turnaround in this business, the company has reduced its breakeven point by a fair margin mainly through fixed cost rationalization.

Escorts Railway Products: The company is one of the key suppliers to the Indian Railways for products including Brake Systems, Couplers, Shock Absorbers, etc with a focus on safety, comfort and the environment. With this wide product range and in-house R&D capabilities, the company is well-poised to capture the immense opportunity presented by Indian Railways.

The railways sector has a potential to grow at a phenomenal rate in the years ahead. With focus on freight corridors, high capacity rolling stock, last mile rail linkages, high speed trains and port connectivity, the opportunities in this sector are in abundance.

As the Indian Railways is on its way to becoming one of the best such networks in the world, Escorts is now focusing on technology upgradation to ride this wave of growth.

Escorts Auto Products: The Indian automobile industry continues to witness weak demand across various vehicle segments on account of slowdown in economic activity and the consequent weakness in consumer sentiment.

However, easing macro headwinds in terms of lower interest rates, lower fuel costs and higher economic growth will emerge as the key drivers for volume growth and profitability.

With more product launches lined up, volume recovery is expected across segments form second half of FY 2016.

Valuation

In FY 2016 we expect the company to register sales and net profit of Rs 4464.13 crore and Rs 131.49 crore respectively. On an equity of Rs 119.28 crore and face value of Rs 10 per share, EPS works out to Rs 11.0. The share price trades at Rs 124. P/E works out to 11.2. The price is also lower than the current book value of Rs 144.

Top

Escorts: Financials
 
  1303 (18) 1403 (18) 1403 (12) 1503 (12) 1603 (12P)
Sales 5922.70 6291.51 4262.68 3985.83 4464.13
OPM (%) 4.9 6.1 6.4 4.0 5.0
OP 289.54 381.24 273.99 161.40 223.21
Other inc. 73.55 81.41 56.76 60.65 66.71
PBIDT 363.09 462.66 330.74 222.04 289.92
Interest 139.61 110.67 67.50 57.11 54.25
PBDT 223.48 351.99 263.24 164.94 235.66
Dep. 74.54 83.22 57.10 66.06 75.31
PBT 148.94 268.77 206.14 98.88 160.36
EO -1.52 3.64 3.79 -30.63 0.00
PBT after EO 147.42 272.40 209.93 68.25 160.36
Total Tax 12.20 27.51 30.66 -6.46 28.86
PAT 135.22 244.89 179.28 74.71 131.49
EPS (Rs) * 7.6 13.5 14.8 8.3 11.0
* on equity of Rs 119.28 crore;
Face value of Rs 10 each
(P): Projections
Figures in crore,
Source: Capitaline Databases

Top

Escorts: Results
 
  1503 (3) 1403 (3) Var. (%) 1503 (12) 1403 (12) Var. (%)
Sales 817.72 982.91 -17 3985.83 4262.68 -6
OPM (%) 2.7 4.7   4.0 6.4  
OP 22.03 45.79 -52 161.40 273.99 -41
Other inc. 25.39 11.03 130 60.65 56.76 7
PBIDT 47.42 56.82 -17 222.04 330.74 -33
Interest 15.94 13.47 18 57.11 67.50 -15
PBDT 31.47 43.35 -27 164.94 263.24 -37
Dep. 21.20 15.24 39 66.06 57.10 16
PBT 10.28 28.11 -63 98.88 206.14 -52
EO 0.14 4.47 -97 -30.63 3.79 PL
PBT after EO 10.42 32.58 -68 68.25 209.93 -67
Total Tax -2.35 0.80 -395 -6.46 30.66 -121
PAT 12.77 31.78 -60 74.71 179.28 -58
EPS (Rs) * # #   9.1 14.8  
* on equity of Rs 119.28 crore;
Face value of Rs 10 each
#EPS can not be annualsied due to seasonality in business
(P): Projections
Figures in crore,
Source: Capitaline Databases

Top

Escorts: Segment results
 
Segments 1503 (3) 1403 (3) Var. (%) % to Total 1503 (12) 1403 (12) Var. (%) % to Total
Sales                
Agri Machinery Products 613.64 802.22 -24 74 3210.83 3521.60 -9 80
Auto Ancilary Products 28.35 30.55 -7 3 103.61 128.77 -20 3
Railway Equipments 54.59 45.13 21 7 183.75 182.54 1 5
Construction Equipments 131.92 110.49 19 16 515.77 466.84 10 13
Others 0.00 0.00 -- 0 0.00 0.08 -100 0
Unallocated 0.93 1.54 -39 0 5.38 5.10 5 0
TOTAL 829.44 989.92 -16 100 4019.33 4304.92 -7 100
Less: intersegment sales 4.70 8.54     20.37 31.73    
Add: Unallocable sales                
Net Sales 824.74 981.38     3998.96 4273.19    
PBIT                
Agri Machinery Products 28.15 63.00 -55 87 229.27 352.26 -35 116
Auto Ancilary Products -2.71 -7.10 -62 -8 -23.66 -25.09 -6 -12
Railway Equipments 10.45 4.48 133 32 17.53 15.50 13 9
Construction Equipments -3.35 -9.89 -66 -10 -24.82 -25.70 -3 -13
Others -0.26 -0.21 21 -1 -1.16 -1.07 8 -1
TOTAL 32.28 50.28 -36 100 197.16 315.91 -38 100
Less interest 15.94 13.47     57.11 67.50    
EO 0.14 4.47     30.63 -3.79    
Less unallocable EO 6.07 8.70            
PBT 10.41 32.58     284.90 252.2021    
Capital Employed                
Agri Machinery Products 1072.99 1047.36 2 44 1072.99 1047.36 2 44
Auto Ancilary Products 51.40 61.04 -16 2 51.40 61.04 -16 2
Railway Equipments 123.61 105.57 17 5 123.61 105.57 17 5
Construction Equipments 174.83 231.05 -24 7 174.83 231.05 -98 7
Others 5.18 6.16 -16 0 5.18 6.16 16090 0
Unallocated 997.36 964.20 3 41 997.36 964.20 -100 41
TOTAL 2425.37 2415.39 0 100 2425.37 2415.39 0 100
Figures in crore,
Source: Capitaline Databases

Top