Saturday, May 22, 2010

>ESCORTS: Galloping along (IDFC SSKI)

Escorts’ transformation is clearly evident in the robust operational performance that each of its business units has been delivering over the last few quarters. Led by improved volume offtake, the earnings of its key agri-machinery division have improved considerably (EBIT of Rs972mn in H1FY10 vs Rs432mn in H1FY09 – a robust growth of 125% YoY). Further, the railway equipment division continues to witness robust volume offtake and the momentum is expected to continue ahead, led by aggressive capex plans (Rs2.5trn over next five years) outlined by the Indian Railways. Also, with a much improved economic outlook (GDP growth expected at 8.1% for FY11) and new model launches, earnings of the construction equipment subsidiary is expected to substantially improve going forward. The auto ancillary division is also on the recovery path with cost cutting measures and development of new spares both for OEMs as well as replacement market. The substantially reduced interest burden (net interest cost of Rs36mn in H1FY10 vs Rs288mn in H1FY09) would further aid earnings growth going forward.

With adequate capacity in place, immense growth potential across businesses, cost-cutting efforts and reduced interest burden, Escorts is expected to witness a sharp delta swing in earnings (estimated EPS at Rs24.1 for FY12 against Rs7.4 for FY09). We believe Escorts would now witness much steady earnings growth led by increasing use of tractors for non-farm applications as well as increased contribution from the non-cyclical businesses including construction equipment and railway equipment. Thus, in our view the Escorts group business model would transform from a cyclical agri-play to a much more stable agri / infrastructure play, which could prompt a re-rating of the stock. On account of the improved earnings visibility across business segments as well as likely outperformance going forward, maintain Outperformer with a revised price target of Rs234.

To read the full report: ESCORTS