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Gladiator Stocks - Escorts - ICICI Securities

Posted On: 2020-07-28 23:03:02


Strategy

Buy Escorts in the range of Rs. 1145.00-1170.00 for target price of Rs. 1380.00 with a stop loss of Rs. 1045.00. Time Frame: Six months

Technical View

In the year 2020, Escorts has emerged as the major out performer in the Auto space. It is currently in a secular up trend forming higher peak and higher trough in all time frame

The entire up move since bottoming out in March 2020 (Rs. 526) is well channelled signalling sustained demand at elevated levels. The stock has recently rebounded taking support near the lower band of the channel as can be seen in the adjacent chart. Hence provides fresh entry opportunity

The stock earlier during May 2020 has resolved above a major falling supply line joining highs of May'18 (Rs. 1017) and Feb'20 (Rs. 915) signalling a structural turnaround and resumption of the long term up trend

We expect the stock to continue with its up move and head towards Rs. 1380 in the medium term as it is the 161.8% external retracement of the entire CY 2018-2019 decline (1017- 424) placed at Rs. 1380 levels

Fundamental View

Escorts Ltd (Escorts) has significant exposure to the rural economy through its tractor division where it is one of the prominent players thereby commanding domestic market share at ~ 11.6% as of FY20. We expect the tractor segment to stay largely unaffected by demand side issues being faced by the rest of the automotive industry amidst Covid-19 outbreak, courtesy stability in the outlook of rural incomes (on the back of good Rabi crop harvest, remunerative crop prices, healthy water table levels and normal monsoon 2020) and lack of regulatory disruption like BS-VI norms. Longer term demand drivers like the government's continued focus on doubling farm incomes and improving rural infrastructure as well as underpenetrated nature of farm mechanisation in India stay intact. Escorts derives ~77% of its sales from the tractor segment with rest being constituted by construction equipment (~15% of sales) and railways (~8% of sales)

Domestic tractor segment is outpacing rest of the automotive space by a wide margin after lifting of nationwide lockdown. July retail volumes are ~20% higher than pre Covid levels (vs. ~40% decline for the overall industry), and up ~9% YoY, ~33% MoM - showcasing the robustness of demand on ground. We believe the demand trajectory would continue to remain healthy in coming quarters courtesy positive farm sentiment. Escorts continues to make inroads to newer geographies by focusing on channel expansion and new product development and is well placed for further market share gains. We build 5% tractor volume CAGR at Escorts over FY20-22E (2.5% YoY growth in FY21 & 7.5% YoY growth in FY22E)

Sales, PAT at Escorts are expected to grow at 7.4%, 17.3% CAGR, respectively, in FY20P-22E. The company is net cash positive with surplus cash on books to the tune of ~ ₹ 1,000 crore as of June 2020. It also realises healthy cash flow from operations and possesses an capital efficient business model with RoCE > 15%. We hold a positive view on the company courtesy bright tractor division prospects, healthy cash on books and strategic entry of Kubota Corporation.

For details, click on the link below: https://www.icicidirect.com/mailimages/IDirect_GladiatorStocks_Escorts_Jul20.pdf

Shares of ESCORTS LTD. was last trading in BSE at Rs.1156.85 as compared to the previous close of Rs. 1106.95. The total number of shares traded during the day was 201965 in over 8170 trades.

The stock hit an intraday high of Rs. 1168.75 and intraday low of 1096.1. The net turnover during the day was Rs. 230410423.


Source: Equity Bulls

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