Monday, April 26, 2010

>ESCORTS: Strong trends continue (EDELWEISS)

Strong quarter: Profits well ahead of estimates
Escorts’ Q2FY10 PAT, at INR 444 mn (up 1093% Y-o-Y; 90% Q-o-Q), was well ahead of our estimates (INR 244 mn). The strong performance reflects improved profitability and volume growth in the core tractor segment.

■ EBITDA margins up 120bps Q-o-Q
The top-line growth of 37% Y-o-Y was led by 51% Y-o-Y volume growth in tractors. Raw material costs declined 87bps Q-o-Q, largely on price hikes taken at the beginning of the quarter. Staff and other costs showed a downturn (down 210bps Y-o-Y; 33bps Q-o-Q) as benefits of operating leverage kicked in. Net interest income was positive (INR 9 mn vis-à-vis interest outgo of INR 45 mn in Q1FY10) on account of interest refunds from banks (~INR50mn).

Repurchases debentures in construction subsidiary
In April 2010, Escorts redeemed the convertible debentures held by DAMF Equipment Holdings (DARBY) in Escorts Construction Equipment (ECEL: a wholly owned subsidiary of the company) for INR 1.3 bn. Had these debentures converted, equity of the subsidiary would have diluted by ~25%. This indirectly values ECEL at ~INR 5bn.

■ Balance sheet strength shines
The company’s balance sheet remains strong with greater profitability leading to an increase in cash balances. The net debt currently stands at INR 246mn, implying a negligible D/E of 0.02x. The working capital position remains comfortable. These factors were reflected in the recent credit upgrade from ICRA.

Outlook and valuations: Going strong; maintain ‘BUY’
We believe the company has successfully resolved balance sheet related issues, and is now firmly focused on its core businesses. While the tractor business is on track, we are also enthused by the company’s focus on segments in the infrastructure space. With the strong performance, we revise our estimates for EPS for FY10 and FY11 by 9.7% and 15.7%, respectively. Despite the recent run-up (up 30% in the past three months), the stock is trading at P/E of 11.8x FY10E and 9.7x FY11E, respectively, considerably lower than its peers. Also, upsides from the construction business could be substantial. We maintain ‘BUY’ on the stock.

To read the full report: ESCORTS