Q4FY23 Review: Escorts Kubota: Q4 margin strong, but tractor growth uncertain

11 May 2023 , 10:24 AM

Escorts’ Q4 Ebitda came in 16% above IIFL Capital Services estimates, due to sharp sequential improvement in margins. Escorts’ preceding quarters’ margins were significantly beaten down. While the QoQ improvement is impressive, Q4 margin was lower than the normalisation that we were building in FY24/FY25. As a result, analysts of IIFL Capital Services EPS estimates are unchanged post these results. Mgmt came across optimistic on tractor demand (post what would be a flat Q1FY24) and further margin improvement (built into analysts of IIFL Capital Services estimates). However, we believe there would be risk to FY24 volume growth if monsoon is impacted by El Nino.

Q4 Ebitda 16% above estimate on margin beat: 

Q4 revenue grew 17% YoY and came in line with our estimate. Tractor volumes grew 13% YoY in the quarter on a low base (-33%). Construction equipment and Railways revenues also clocked strong growth. Ebitda margin was down 265bp YoY but improved 240bp QoQ to 10.8% (gross margin-led; 150bp beat). Absolute Ebitda beat analysts of IIFL Capital Services estimate by 16%; so did PAT.

Mgmt is optimistic on tractor demand and margins: 

Mgmt guided to tractor industry staying flat YoY in Q1FY24, due to shift in festive season and unseasonal rains. However, mgmt is optimistic on demand through FY24 (guidance: low-to-mid single digit growth), driven by healthy reservoir levels (agri use) and infra spend by government (non-agri use). Mgmt is also optimistic on continued improvement in margins driven by further cut in input costs.

Retain REDUCE on demand uncertainty, high valuations: 

Analysts of IIFL Capital Services forecasts for FY24/FY25 were already building margin normalisation from the beaten-down levels of Q2/Q3FY23. As a result, EPS estimates are unchanged post these results. They believe there would be risk to FY24 volume growth, if monsoon is impacted by El Nino. The stock is expensive at 21x FY25 EPS, even more so if they account for merger with 2 Kubota JVs (7% dilutive based on FY22 financials).

The stock is expensive at 21x FY25 EPS. If we account for the EPS dilutive impact of the impending merger with 2 Kubota JVs (7% based on FY22 financials), the stock is even more expensive. Analysts of IIFL Capital Services maintain REDUCE with TP of Rs 1,800.