Q3FY24 Review: Escorts Kubota: Weak tractor demand leads to EPS cuts

9 Feb 2024 , 01:29 PM

Escorts’ Q3 Ebitda came in 7% below analysts if IIFL Capital Services estimate with lower than-expected revenue and margins. The tractor cycle worsened due to erratic rainfall in 2023, weak festive sales and resultant high dealer stock. Escorts’ management cut FY24 industry outlook from +/-2% to -6/7%. Dealer stock at the industry level is still high; so recovery in the industry would depend on normalcy of monsoon in 2024 (4-5 months away). Analysts of IIFL Capital Services cut FY24-FY26 Ebitda estimates by 7%/6%/5%. Retain REDUCE with TP of ₹2250 (23% downside), based on 20x 2YF EPS. Integration with Kubota (global) was to bring in 2 benefits – higher tractor exports and sourcing of components from India. However, Tractor exports are weak due to global demand environment. Component sourcing by Kubota may take some time to commence. Merger with Kubota JVs in India would be EPS dilutive (not built in earnings yet). 

Q3 Ebitda 7% below estimate: 

Q3 rev grew 3% YoY (3% miss), on robust YoY growth in Construction Equipment, while Agri and Railways were down YoY. Gross margin (GM) came off 170bps QoQ to 30.6% (est. 32.0%), due to weaker segmental mix. However, Ebitda margin improved 60bps QoQ to 13.5%, owing to low operating expenses. Absolute Ebitda came in 7% below est., while PAT miss was contained at 4% due to higher other income. 

Tractor cycle has worsened: 

Mgmt. cut FY24 industry volume growth guidance from +/-2% to a decline of 6-7%. The tractor cycle worsened due to erratic rainfall in 2023 and weak festive sales. Industry-level dealer inventory is high, which may need correction in coming months. Alternatively, the industry would not be able to stock-up heading into the seasonally strong period. As a result, the outlook for coming months is weak. Recovery in the industry would depend on normalcy of monsoon in 2024 (4-5 months away). 

Valuations demanding at 28x FY25 EPS: 

Despite low base in FY24, there is no certainty on high growth in FY25. Yet, analysts of IIFL Capital Services are building 5% industry growth in FY25/FY26, which drives a 10% EPS Cagr for Escorts over FY24-26. At 28x FY25 PE, analysts of IIFL Capital Services find the stock expensive. Merger with Kubota JVs may be EPS dilutive, implying that current multiples are even higher.