Escorts Limited - Playing for Margin Expansion

Stock Opportunities
21

Key highlights of Conf Call by Capital Market:

  • During Sep’13 quarter, Escorts registered a Tractor volume sales growth of 15% as compared to 20% of the industry. As per the management, company continued to focus on price and no discounts were offered as compared to discount offers by its competitors. For full year ended Sep’13, the company’s Tractor volume grew by about 9.5% to 66230 with about 10.5% of market share in India.
  • Key markets that supported the growth were Andhra Pradesh, Madhya Pradesh, Rajasthan and Chhattisgarh. Some of these markets grew by more than 30% YoY. Market is expected to stay buoyant in Oct and Nov as well, given the festive season. All macroeconomic factors such as crop prices, productivity, soil moisture, government focus on rural spending etc are favoring the farm equipment business. As per the management, farm Mechanization is the future and company is well prepared for it. Overall, management expects the Tractor industry to clock a growth of around 13-15% in FY’14.
  • Escorts have more than 725 dealers and have added another 176 dealers in 12 months ending Sep’13. As per the management the focus will be to continuously introduce high margin and high power specialized tractors and further improve the margins from current around 11% to around 13% in next couple of years.
  • Strong monsoon, higher MSP, new variants of existing products, increase in dealer footprints and price hikes together with lower material costs, all led to increase in Ebidta margin nearly by 250 bps. Some of the new launches include new Executive Series and Euro Series and an extension of hugely successful Diesel Saver Plus series has been launched in the festive season.
  • On Tractor exports front, where Escorts has very negligible presence, the company is all out to launch its products in EU markets particularly in Germany. The Indian market ends in between 25HP to 110 HP, whereas the export markets starts from 125 HP and above. Thus, the new category of tractors has already been made and company will go all out for exports in next 3 months.
  • On construction equipment division, the slowdown in infrastructure spending has resulted in sharp decline in volume on both QoQ and YoY with volumes stood at 661 in quarter ended Sep’13 as compared to 888 for the quarter ended Sep’12, with 12 months volume stood at 3375 as compared to volume of 5311 for 12 months ending Sep’12. Management doesn’t expect any great happening for the sector in next 6 months either. However for FY’15, management expects the segment to grow in double digit, as the sector has hit its bottom and can’t go further down.
  • Railway business has an order book of around Rs 34 crore which will be consumed in couple of months, as compared to an order book of Rs 55 crore in June’13 quarter. After virtually zero orders for new wagons, Railways are expected to float a Wagon Tender which will boost the Air Brake requirements in Mar’14 quarter. Overall, the outlook for the segment is of cautiously optimistic.
  • Pressure on sales and margins continue on the Automobile division due to general slowdown and higher interest rates. However management adopted tight costs control, which helped margin to improve in this segment. Management is ready to sell the division, if a suitable buyer is found. Overall, tightly liquidity and high interest rates continue to dampen the industry. However, some revival of demand is expected in festival season.
  • Company has total debt of about Rs 420 crore and about Rs 80 crore is due for repayment during next year. Company had incurred a capex of about Rs 80 crore in 12 months ending Sep’13 and will incur another capex of about Rs 50 crore in next 12 months.
  • The tax rate for the company is lower as company received some tax advantages on R&D and Rebate on Section 43B. Otherwise the average tax rate for the company will hover around 20%.
  • Overall, management continues to remain optimistic about future growth despite challenging macro economic environment.
  • The company has changed its financial year from September to March and thus, the financial year will be extended by 6 months ie up to 31stMarch 2014.
22

**

Playing out as per expectations

Escorts Ltd has informed BSE regarding “Escorts Agri Machinery Domestic _**Volumes grow by 25 percent in October 2013”

**_

**November will also be a good month !
**

Key Market: **

31stMarch 2014.

23

Con call Key highlights by Capital Mkt

  • During Dec’13 quarter, Escorts registered Tractor volume sales growth of 11.5% to 19047 tractors. All macroeconomic factors such as crop prices, productivity, soil moisture, government focus on rural spending etc are favoring the farm equipment business. As per the management, farm Mechanization is the future and company is well prepared for it. Overall, management expects the Tractor industry to clock a growth of around 13-15% in FY’14 and 12-15% in FY’15.
  • Growth within the Tractor industry on geographical basis was pretty uneven. Generally, North and Eastern market which constitute about 60% of total demand of tractor industry, grows the fastest and south and Western market which constitute about 40% of total demand, grows at slower pace. In FY’14 so far, South and Western markets have grown by about 40% and North and Eastern market have grown at much lower rates. South and Western market are more prone to subsidy and government actions and thus the near term elections plus State elections of last year, helped in the growth of Tractor industry. Management of Escorts expects the growth in Southern and Western market to continue in FY’15 as well.
  • Escorts has about 3% market share in South and company plans aggressive marketing and sales promotion campaign plus new launches to increase the market share to about 6-8% in next year.
  • Overall, about 10% of total tractor market is from 0-30 HP segment, about 35% of total tractor market is from 30-40 HP segment and major chunk of about 50% of tractor market comes in 40-50 HP segment. Escorts is not present in 0-30 HP segment, as realizations are too low in this segment. But the company is strongly present in 30-40 HP and 40-50 HP segment. However in the past the company was losing its market share from about 20% to about 15%. Management expects the market share to increase only from here with new and high variants of tractors. About 50% of Southern market is of 40-50 HP tractor segment.
  • As per the management the focus will be to continuously introduce high margin and high power specialized tractors and further improve the margins from current around 10% to around 13% in next couple of years. Exports will also play a big role in better realizations and thus margins.
  • The company has revised the Tractor prices in Nov’13 and the demand is so strong that volume growth continues. Some of the new launches include new Executive Series and Euro Series and an extension of hugely successful Diesel Saver Plus series has been launched in the festive season. High end HP series were also launched for exports to EU markets.
  • On Tractor exports front, where Escorts has very negligible presence, the company is all out to launch its products in EU markets particularly in Germany. The Indian market ends in between 25HP to 110 HP, whereas the export markets starts from 125 HP and above. Thus, the new category of tractors has already been made and company will go all out for exports in next 3 months.
  • The challenges on construction equipment division continue to remain in Dec’13 quarter. Management does not expect any revival in this industry in near term. Construction equipment volume went up sequentially by 12% to 737 units for Dec’13 quarter. For FY’15, management expects the segment to grow in double digit, as the sector has hit its bottom and can’t go further down.
  • Railway business started the quarter with an order book of around Rs 34 crore which consumed in Dec’13 quarter and as on 31stDec’13, the order book stood about Rs 38 crore, which will be consumed in Mar’14 quarter. Delay and slowdown in finalization of orders continues to remain for this segment. The company focused on new generation products which were launched in past 6 months. Overall, the outlook for the segment is cautiously optimistic.
  • Pressure on sales and margins continue on the Automobile division due to general slowdown and higher interest rates. However management adopted tight costs control, which helped margin to improve in this segment.
  • Management is looking for a strategic tie up or a partner for this segment to take the business to next level. High interest rates continue to dampen the industry.
  • Company has total debt of about Rs 420 crore and plans to incur capex of about Rs 60-70 crore every year. Debt will not increase much from the current level.
  • The tax rate for the company is lower as company received some tax advantages on R&D and Rebate on Section 43B. Otherwise the average tax rate for the company will hover around 20%.
  • Overall, management continues to remain optimistic about future growth despite challenging macro economic environment.
  • The company has changed its financial year from September to March and thus, the current financial year will be extended by 6 months ie up to 31stMarch 2014.
24

**

Hi Hemant,

Thanks for nicely capturing the concall transcripts. This is my first post in Valuepickr and therefore I have choosen the stock about which Iam most bullish and which constitutes 75% of my portflio right now ( yes, I feel very comfortable with insane level of portfolio concentration if I develop conviction about a company).

My Investment thesis:

I ambullish on Escorts at the moment (although not to the extent that I was in October 2013). I started accumulating the share in the band of 87-93 (inOctober 2013)when it was trading at 7 PE. Now, here was a company whose earnings were exploding, business conditions were turning favourable, and significant accumulation was going on by insiders. On top of that, the company was turning around the cost structure of its operations and was serious about competing with the big guys with a clearly differentiated strategy. They want to be in only high end tractors and want to chase only the most profitable segment. My experience suggests me that whenever a company follows a strategy of not chasing market share and chasing profitability with excellent products, it almost always translates into higher ROE. Of course, the management was trustworthy. The most important catalyst was that the tractor industry was bottoming out and a new cycle was starting. The market has slowly started to re rate the share and the sector per se this month. However, I believe the best is yet to come and the share has the potential to touch 300 by September-October when the re rating would be complete along with the bulk of earnings expansion. Farm mechanization in India is an idea whose time has come due to various structural issues. The companies who have positioned themselves well to play this out should be in a position to create significant wealth for their investors over the next few years.

My future Outlook:

The share corrected from an all time high of 145 to 120 (closing price as of 30th January). With all due respect to Mr. Market, I believe the market istaking a myopic view about the company. The tractor numbers were not very encouraging for the month of November, Decemebr as thesouthern and Western markets are doing very well, where Escorts does not have a significant presence. In fact, the January tractor numbers which will be reported on 3rd/4th Feebruary also may turn out to be dissapointing. However, market seems to be missing the fact that Feb-June is the season of harvesting of Rabi Crop in India. The biggest rabi crop is Wheat and a lions share of wheat production in this country is done in North and Central India (which are strong home markets for Escorts). The tractor number from February onwards should beat the market expectations.

The share is trading at 120 right now as I write… The company has posted an EPS of 12.5 in the first three quarters for FY14. I am assuming an EPS of 3.5 for the last quarter (assuming that they sell 16,000 tractrors this quarter which I think should not be a problem). So at a full year EPS of 16 and 12 PE, the share should be trading at around 200 by April- may if not earlier.I am not even discounting FY15 numbers, which BTW I believe will be a record breaking year for Escorts. Take advanatge of the markets myopism and put your money to work for a nice 50% in three months kind of returns.

Risks: If the company is not able to break through into the southern and western markets, then we are only taking about a nice 50% positional bet. If it can, we are looking at a multibagger folks. I am betting it can!!

P.S.-This stock is a turnaround play.Therefore, if you are models dont allow you to buy companies which dont have an X amount of earnings growth, ROCE, Margins etcc…you will have to skip it. The numebrs will improve over the next 2-3 quarters and the imprvoement in numbers will surpirse you because of the the managements absolute focus on margins and profitability. Focus on the big picture folks!! I am betting on farm mechanization big time.Iurge you guys to also go through the concalls for the last 4 quarters to understand the strategy of the management better. The NANDA’s are back with a bang!!

Con Mkt **

31stDec’13, 31stMarch 2014.

25

**

Hi Hemant,

Thanks for nicely capturing the concall transcripts. This is my first post in Valuepickr and therefore I have choosen the stock about which Iam most bullish and which constitutes 75% of my portflio right now ( yes, I feel very comfortable with insane level of portfolio concentration if I develop conviction about a company).

My Investment thesis:

I ambullish on Escorts at the moment (although not to the extent that I was in October 2013). I started accumulating the share in the band of 87-93 (inOctober 2013)when it was trading at 7 PE. Now, here was a company whose earnings were exploding, business conditions were turning favourable, and significant accumulation was going on by insiders. On top of that, the company was turning around the cost structure of its operations and was serious about competing with the big guys with a clearly differentiated strategy. They want to be in only high end tractors and want to chase only the most profitable segment. My experience suggests me that whenever a company follows a strategy of not chasing market share and chasing profitability with excellent products, it almost always translates into higher ROE. Of course, the management was trustworthy. The most important catalyst was that the tractor industry was bottoming out and a new cycle was starting. The market has slowly started to re rate the share and the sector per se this month. However, I believe the best is yet to come and the share has the potential to touch 300 by September-October when the re rating would be complete along with the bulk of earnings expansion. Farm mechanization in India is an idea whose time has come due to various structural issues. The companies who have positioned themselves well to play this out should be in a position to create significant wealth for their investors over the next few years.

My future Outlook:

The share corrected from an all time high of 145 to 120 (closing price as of 30th January). With all due respect to Mr. Market, I believe the market istaking a myopic view about the company. The tractor numbers were not very encouraging for the month of November, Decemebr as thesouthern and Western markets are doing very well, where Escorts does not have a significant presence. In fact, the January tractor numbers which will be reported on 3rd/4th Feebruary also may turn out to be dissapointing. However, market seems to be missing the fact that Feb-June is the season of harvesting of Rabi Crop in India. The biggest rabi crop is Wheat and a lions share of wheat production in this country is done in North and Central India (which are strong home markets for Escorts). The tractor number from February onwards should beat the market expectations.

The share is trading at 120 right now as I write… The company has posted an EPS of 12.5 in the first three quarters for FY14. I am assuming an EPS of 3.5 for the last quarter (assuming that they sell 16,000 tractrors this quarter which I think should not be a problem). So at a full year EPS of 16 and 12 PE, the share should be trading at around 200 by April- may if not earlier.I am not even discounting FY15 numbers, which BTW I believe will be a record breaking year for Escorts. Take advanatge of the markets myopism and put your money to work for a nice 50% in three months kind of returns.

Risks: If the company is not able to break through into the southern and western markets, then we are only taking about a nice 50% positional bet. If it can, we are looking at a multibagger folks. I am betting it can!!

P.S.-This stock is a turnaround play.Therefore, if you are models dont allow you to buy companies which dont have an X amount of earnings growth, ROCE, Margins etcc…you will have to skip it. The numebrs will improve over the next 2-3 quarters and the imprvoement in numbers will surpirse you because of the the managements absolute focus on margins and profitability. Focus on the big picture folks!! I am betting on farm mechanization big time.Iurge you guys to also go through the concalls for the last 4 quarters to understand the strategy of the management better. The NANDA’s are back with a bang!!

Con Mkt **

31stDec’13, 31stMarch 2014.

26

http://articles.economictimes.indiatimes.com/2014-01-31/news/46870074_1_tractor-maker-escorts-agri-machinery-division-market-share. ET has come out with a nice article on the story playing out at Escorts.

27

Key Points of the call by Capital Mkt:

  • The company reported a 41.49% decline in net profit at Rs 34.11 crore for the first quarter ended June , 2014. The company had posted a net profit of Rs 58.3 crore for the corresponding period last fiscal year.Net sales of the company stood at Rs. 1,122.1 crore for the quarter under consideration, down 4.33% as against Rs. 1,172.89 crore for the same period year ago.
  • Underperformance in the tractor segment has been due to growth in smaller tractor segment (<30 HP segment) which is not a focus segment for Escorts.The current debt outstanding for Escorts is Rs 376 crore.
  • The current order book for the railways division stands at Rs 33 crore, which is likely to get executed in the next quarter.
  • The management has indicated that it will undertake a price increase from 1 August 2014 to counter inflationary pressure on the raw material cost front. It will be around 1%.The company expects that the improvement in infrastructure activities will lead to an increase in demand for second hand tractors, which will also benefit the demand for tractors.The company intends to focus on improving market share in the tractor market, but will also maintain its focus on growth in the construction equipment business
  • Regarding its plan for the auto ancillary segment, the company is looking to rope in a partner who could bring new technology, products and it is in talks with a European and an Australian company with further possibilities of contract manufacturing. The management expects the same to conclude by end of H2FY15.
  • The company has initiated VRS. Current employee strength for the automotive division is ~550, of which VRS would be given to around 250-300 employees. It would incur a cost of Rs 25-30 crore.The company expects a nominal capex of Rs 100-150 crore for FY15-16.
28

CONFERENCE CALL

Escorts

Tractor industry is expected to grow by around 10% in FY’17

The company held its conference call on 2nd February 2016 which was addressed by key management

Key Highlights

About 13319 tractors were sold in Dec’15 quarter down by 16% YoY, however sequentially the volume was up by about 16.5%. For 9 months ended FY’16, tractor volume was down by 19% to 39632 units.

South and Western market which contribute around 48% of the total tractor segment, grow by 22% while the rest North and Central side, saw a de growth of 13% in Dec’15 quarter for the company.

The company’s market share in Tractor segment stood at 10.1% for 9 months ended Dec’15 as against 10.3% YoY

New products to be introduced in Mar’16 quarter which should see strong response. Management expects the benefits of lower material costs to come in the tractor segment and better margins expected

Poor monsoon, worsening situation of water level and lower MSP prices have resulted in lower incomes in rural economy and thus lower spends. Management expects the industry to be flat to marginally positive in Mar’16 quarter. While it’s too early to predict, given the lower base of past 2 years, management expects the tractor industry to grow by around 10% in FY’17.

In construction equipment side, 750 machines is the break even machines required to be sold in construction equipment segment in a particular quarter. However the company sold about 698 which were lower by 13% on YoY basis.

As per the management FY’16 is the 5th consecutive year of de-growth in construction equipment industry. While Pavers, crawler excavators, concreting equipments have seen some positive movements, backhoe loaders and off highway trucks continue to decline. Compactors have seen some strong demand in the quarter.

Grown market share in Pick and carry however, the company in Back hoe loader and crane segment lost some market share

As per the management, in light of the road projects that have been announced and further positive expectations on this sector and given the lower base, cyclical revival is soon expected. However any structural revival is expected only after a year.

Railway division has an order book of Rs 40 crore which will be executed in next 3-4 months. The segment will continue to do well and strong orders are expected by the end of the year.

Lower exports and lower aftermarket sales affected the auto product division, where revenues are down. The company aims to increase margins in short term and expects the segment to break even in next 2 quarters.

Total debt stands at Rs 443 crore as on Dec’15.

Overall for all the segments, major benefits of raw material costs to come in Mar’16 quarter, given the higher commodity prices of Mar’15. About 100 bps margin benefit due to lower material costs is expected in Mar’16 quarter.

The tax rate is lower due to R&D spends in range of around 50-60 crore and the company gets weightage deduction which helps lower tax rate

29

CONFERENCE CALL - from Capital Markets

Has taken steps to consistently increase its share of tractors business in Southern India

The company held its conference call on 25th May 2016 which was addressed by key management

Key Highlights

  • The company has an overall market share of around 10.3% in Tractor industry in India.

  • For FY’16, overall tractor volumes for Escorts were lower by around 12% as compared to a 10% fall in the industry volumes. Escorts is not strong in Southern markets like Andhra Pradesh, Tehlangana, Karnataka etc, which in an year of fall, also grew on YoY basis. Hence Escorts’ fall looks steeper than the industry fall.

  • However the company has taken lot of steps and is able to consistently increase its share in Southern region. Also the negative growth rate in Northern region is also addressed and management expects growth rate to pick up for the company in these geographies as well.

  • For June’16 quarter, management expects tractor volume growth of around 4-6% for Escorts and if the monsoon is normal, tractor volume growth of around 10% is expected from Escorts.

  • The company also has launched Euro 45 and Euro 50 Series in Power Series during FY’16 which received strong response. Management expects the range will show good volume growth in FY’17. Further new high speed tractors are planned in FY’17 as well.

  • There is not much Inventory of tractors at dealers end and everybody is going light.

  • There is an EO expense of around Rs 13 crore which represents a settlement of a liability with Korean party for some guarantee provided in 2007.

  • As per the management, the segmental PBIT margin of around 8.2% for FY’16 is very much sustainable and can be improved going forward.

  • Lower material costs and other costs cutting initiatives played a significant role in overall improvement in margins of the company by 60 bps for FY’16. Management expects margin improvement should happen further.

  • Total debt outstanding as on Mar’16 stood at Rs 355 crore as compared to around Rs 450 crore for Mar’15. Debt will continue to be lower going forward as well.

  • The construction equipment industry has grown in double digits in Mar’16 quarter. However for Escorts, due to loss in market share in Backho loader business and sale of lower value added product sale like that in pick and carry space, the net sales were lower by around 6%. Higher imports also resulted in higher costs and lower margins for the company.

  • Management believes that the segment has clearly turned around and will show growth in next couple of years. For Escorts, management aims to reach a turnover of around Rs 1000 crore for construction equipment in next 3 years with Ebidta margin of around 8-10% from current negative margins. Localization, higher volumes, new products and other broad band strategies will help in the turnaround of this division. Management expects the entire road map and more plans to be shared by the end of H1 FY’17.

  • Management is extremely optimistic for Railways segment. While Mar’16 quarter Railway segment was affected due to provision for obsolete inventory and adverse product mix, overall the segment grew by around 12% with improvements in PBIT margin for FY’16. The current order book position is around Rs 55 crore and the company received another order of around Rs 44 crore in April’16. Lot of tenders are bid and orders are awaited in this segment.

  • In Auto ancillary segment, management is looking for technology partners and altogether a new business model. It expects the segment to break even in next 12-15 months, but is awaiting for further clarity on technology front.

  • The tax rate is lower due to R&D spends in range of around 50-60 crore and the company gets weighted deduction which helps lower tax rate

30

This stock has been soaring for last few months in anticipation of good earning due to a good monsoon. It has risen 185% from Feb’s low.Tractor business in not in general a buy and hold business. It’s cyclical in nature. Historically seeing it topped most of the time in November.
What PE would you sell Escorts?

Disc: Have been holding from 120 Levels. Trying to figure out what should be the exit level

31

@ishandutta2007 you still holding escorts? if exited @what price? and reason behind it?

32

Yes exited at 400 and 600, still hold tiny part but not significant to my portfolio.
No particular reason of exiting, possibly because I had too many stocks was finding difficulty in tracking, so decided to book profit on few.

33

thanks!!
I got in @ around 110 and exited @175 as my probably I had very narrow vision or may be could not see the future… thanks agian for the update!!

34

But it has managed to show decent profit growth as per Escorts Kubota Ltd financial results and price chart - Screener.
I am new to tractor industry. When tractor companies are struggling (poor margin or growth), how did it managed to do this decent.

35

Did Mr Big Bull just cut his stake in escorts in last qtr? Saw this in the pattern for the quarter posted in NSE. I hope I am wrong, I Hv a profitable long term position in counter

36

I work for one of the competitors of escorts.FY17-18 is a great year for tractors .Infact ,this year’s (FY 17-18) volume is the highest ever surpassing FY13-14 records(from my memory)
Triggers like Good monsoon & new products launches pushed the stock higher.
Escorts have wide range of products under their Farmtrac and Powertrac brands.
Last year they launched several new products like euro series ,classic T20 which was received well by the market.
And their competitive pricing structure coupled with decent features is an attractive package for the farmers.
And most players like John Deere,Swaraj ,M&M did farely well this year
One should wait for full year’s numbers.

2 Likes
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Because u r in this industry…what is the vol growth industry is expecting in 18-19 and what’s ur guess for possible %/vol escorts growth in that period

Total wow! 46% growth in Jan 18 volumes…even Jan 17 was a 15% growth over jan16 so not an optical growth…

@pla7yer bro can u pls give input to my above query on growth exp next yr

Its a major position of mine for 1-2 years so want to understand sustainability of growth…

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For FY 18-19 we are expecting 12-15 % Growth in Volumes

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Extremely Surprised that this thread has not seen more frenetic activity considering the stupendous rally in stock price over the last 1 year. Have to give it to the management of Escorts who delivered on their stated objective of transforming the company over FY14-FY17. Last two years have been phenomenal driven by better product mix and positioning, albeit aided by benevolent rain gods

Update: Although I had built up a significant position here between June 2014- December 2014 at an average price of Rs.70-80 and my thesis was absolutely bang on (as articulated by me in this thread in 2014), this has ended up becoming yet another regret story for me. It should been a pretty 12 bagger for me by now. But the sad part is that I booked out in 2015 at Rs.140 (due to limited momentum) and this gets added to my long list of have beens.

Valuepickers, Questions for your folks? Would love to hear whats your views at this market cap. Looks good still?

40

I work for one of the competitors of escorts
Actually, couple of things went well for escorts last year.
Subsidies, good monsoon backed by new product launches of escorts
Last year the industry witnessed record sales of 6.87 lakhs which was the highest ever.
Lesser known player called international tractor clocked 1 lakh volumes
So you can imagine how good the industry was last year.
But industry is like to consolidate this year with just 12 % growth.
So don’t really expect any rally like last couple of years.
The company will come up with very good volumes in October since it is festival season
So expect Q3 volumes to be good
Other than that honestly there is no multi bagger opportunities from here.
I don’t have a position in escorts.

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