>ESCORTS (EDELWEISS)

■ Strong Y-o-Y growth, but sequential disappointment
Escorts reported a profit of INR 234 mn in Q1FY10 (versus a loss of INR 0.4 mn in Q1FY09). Revenues, driven by strong tractor volumes at INR 6bn were up 21% Yo- Y but flat Q-o-Q. Although EBITDA margins improved 260bps Y-o-Y, the sequential decline in excess of 350bps disappointed. The tax rate was also well ahead of expectations.

Margins disappoint but expect improvement ahead

■ High material costs compress margins
EBITDA margin, at 8.9%, posted a sequential decline of 370bps during the quarter, which was disappointing. While cost-cutting measures led to a sequential decline in other operating expenses (down 110bps Q-o-Q), raw material expenses-to-sales ratio jumped 460bps Q-o-Q. This may be partially attributable to higher commodity costs.

■ Lower interest costs reflect improved balance sheet strength
The 48% sequential decline in interest costs to INR 67.8 mn reflects the substantial decline in debt with the D/E ratio close to 0.12:1. Also, the absence of any one off / extraordinary items seems to indicate that most balance sheet related issues have been adequately addressed in the past quarters.

■ Outlook and valuations: Positive; maintain ‘BUY’
We believe Escorts is now more focused with the teething balance sheet issues subsiding. While Q1FY10 results do disappoint, we believe the coming quarters are likely to post better results on account of: (a) the average increase of 3-4% in tractor prices that the company has effected in January; and (b) lower tax rate on account of write offs in the previous years. Further, we expect strong cost cutting measures to flow through in the next few quarters.

On our estimates, the stock trades at a P/E of 11x FY10E and 9x FY11E, respectively, considerably lower than its peers. We maintain our ‘BUY’ recommendation on the stock.

To read the full report: ESCORTS