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BUY on Escorts - Strengthening the core - HDFC Securities

Posted On: 2020-05-20 13:19:00


Mr. Aditya Makharia, Institutional Research Analyst, HDFC Securities.

Escorts (Initiating Coverage): Strengthening the core. BUY
(TP Rs 950, CMP Rs 835, MCap Rs 74bn)

We initiate on Escorts with a BUY as the domestic tractor OEM will benefit from the equity investment by Japan's leading tractor major Kubota. The partnership will provide new growth avenues for Escorts across product segments (including mechanised equipment) as well as geographies (new export markets as well as manufacturing base for Kubota's international operations). Further, the government is rolling out structural reforms in the agricultural segment, which will enhance farm incomes. These initiatives will promote mechanisation of agriculture.

Strategic investment by Kubota...: Escorts has deepened the existing relationship with Kubota as the Japanese partner is investing Rs 10.4bn for a 10% equity stake in Escorts. The Japanese major will have a right to nominate two non-executive board members on the Board.

...to provide new growth opportunities across products and geographies:We believe that Escorts will strengthen its tractor product portfolio, which will drive market share gains (~12% currently) particularly in the southern region, where the north based OEM has been traditionally weak. The arrangement will also enable Escorts to be a part of Kubota's international supply chain and the Indian manufacturing unit could be used as a hub for the Japanese partners' global operations. Escorts will benefit from Kubota's expertise in mechanized equipment - the farm machinery segment is nascent in India, with annual sales of Rs 70bn ($925mn). As the Indian farming practices mature, this segment is expected to benefit. We believe that Escorts will be well equipped to gain from this shift.

Agri reforms: The government has rolled out several structural reforms to improve farm incomes such as amending the stringent Essential Commodities Act and allowing inter state trade in agriculture. These initiatives will benefit the agri chain as it will improve price discovery for the produce, thus enhancing farm incomes. Further, the forecast of normal rainfall by the IMD will be supportive of agri incomes in the current year.

Initiate with a BUY: We set a target price of Rs 950 at 15x FY22E EPS. We value the stock at a 15% premium to the last five year average trading multiple. We believe the equity infusion by Kubota will strengthen the balance sheet and will provide multiple growth avenues for Escorts - both in India as well as internationally. Key risks: Any delay in implementation of reforms by the government, delays in fund infusion by Kubota/material changes in the arrangement between the two partners.

Shares of ESCORTS LTD. was last trading in BSE at Rs.835.4 as compared to the previous close of Rs. 810.75. The total number of shares traded during the day was 215694 in over 5353 trades.

The stock hit an intraday high of Rs. 841.2 and intraday low of 817.9. The net turnover during the day was Rs. 179334515.


Source: Equity Bulls

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