ESCORTS LTD. is one of the largest players in the tractor and agri machinery business with humble beginning in 1944. The Company operates in the sectors of agri-machinery, construction & material handling equipment, railway equipment and auto components. Its products include Agri Machinery, Construction Equipment, Auto Products such as shock absorbers, struts and telescopic front, and Railway Products. The Company offers more than 45 variants of tractors from 25 to 80 HP. Escorts Ltd, for Agri Machinery they have Four plants: Farmtrac, Powertrac, Component, Crankshaft & Hydraulic covering manufacturing area of 1,34,000 sq.m., with production capacity of 100,000 tractors p.a. It also has Poland plant, a 100 % subsidiary, has an installed manufacturing capacity of 2,500 tractors p.a Escorts Agri Machinery offers a comprehensive range of tractors with more than 45 Variants starting from 25 to 80 HP. Escorts Agri Machinery segment has positioned itself as a change leader in the agriculture sector having rolled out over 1 million tractors, ranging from hi-capacity engines to modern rugged transmissions and multi-utility taking capabilities. Escorts construction Equipment: Escorts Construction Equipment is a leading materials handling and construction equipment manufacturer. It manufactures and markets a diverse range of equipment like cranes, loaders, vibratory rollers and forklifts. Escorts, is the world largest Pick’n’ Carry Hydraulic Mobile Crane manufacturer. State-of-the-art manufacturing and assembly facility sprawling 250,000 sq.ft. of space, Capacity of 14,000 units p.a. Escorts Railway Products: Escorts Ltd has played a major role in the modernization of Indian Railways with over 40 years of rich experience in manufacturing of critical railway systems. The manufacturing plant spread across an area of over 12,500 sq. meters, Houses superior production and testing facilities, inclusive of a research and development centre; ISO 9001:2008. Product offerings include brakes, couplers, shock absorbs, rail festering systems, composite brake blocks and vulcanized rubber parts. Escorts Auto Products (EAP): Pioneered the manufacturing of automotive shock absorbers in India and it continues to be one of the leading manufacturers of auto suspension products. Plant spread across in an area of 2,25,000 sq.ft., Capacity to produce 3.2 million shock absorbers & struts and 0.3 million front forks. It also trades in oils and lubricants, implements, trailers, tractors, compressor accessories and spares, construction and aero business. It offers Euro Series under Powertrac; Classic Series in 41-50 HP under Farmtrac brand, and FT 6055 Xtra Torque Tractor with approximately 20 speed transmission. Engineering And Maintainace contributes the largest chuck to the company’s top-line at 79 % of total sales. Though it is not their most profitable segment it is the highest contributor to the company’s profit at 7.6 % at operating level. ECE is the company’s second biggest top-line contributor at 13 % but currently suffers loss at operating level. A much smaller segment, Railway Equipment’s at 6 % of top-line contribution is the company’s second most profitable business at 13 % at operating level. Over the period FY12 -15, policy paralysis had led to a severe logjam, bringing infrastructure development to a screeching halt. As a result, Escorts’ construction equipment segment revenues de-grew at a 3-year CAGR of 19 % during FY12-FY16 and there were losses at the EBIT level. With the monsoon progressing well and government spending on infrastructure projects at an all-time high, the fortunes of this segment have started to look up. This should lead to a recovery in the demand for construction equipment. Escorts’ railway segment revenues have de-grown at a 3 year CAGR of 8 % Rs. 205 crore in FY16. With the Railways being a thrust area for the government which is expected to spend Rs 1 lakh crore per annum over the next five years and 100 % allowance in FDI, this segment opens a huge opportunity for Escorts as it is one of the major vendors to the Railways. Escorts supplies manufactured products like brakes, couplers and shockers which has combined market size of Rs. 500 crore to the Railways. It has introduced two new products – Bogey Mounted Brake System (completed testing) and Axle Mounted Brake System (ongoing testing), which are in advanced stages of deployment and are Rs. 300 crore opportunity. Escorts’ has a presence only in three categories, viz., Earthmoving-Backhoe Loaders, Material Handling - Pick and Carry cranes and Road Building-Compactors. And it is expected that all the segments to do well in the short to medium term. Escorts by virtue of being a dominant player in all these segments is expected to be one of the biggest beneficiaries. The ECE segment expected to breakeven by FY17. The ECE volumes stood at 698 units in 3Q FY16. ECE is required to sell 750 units in a quarter in order to achieve its break-even point, The team is confident of breaking even from FY17 onwards due to initiatives like realizing better Average Selling Price (ASP), inclination towards higher contributing model and cost reduction. ERP new products to further enhance profitability Escorts has over 40 years of rich experience in manufacturing of critical railway systems (Safety and comfort) and has played a major role in the modernization of Indian Railways. ERP’s existing products contributes about Rs. 1,837 mn towards Escorts revenue in FY15. ERP team received a development order for Axel Mounted Disc Brakes in 2Q FY16 and company expects to execute the order by end of FY16. The new segment has a market potential of Rs. 3 billion with only one competitor. Escorts scouting for strategic partner to divest & reducing losses in EAP segment EAP pioneered the manufacturing of automotive shock absorbers in India. Its key customers are BEML, Tata Motors, TVS, Maruti Suzuki, Eicher Motors, Piaggio, Polaris and Yamaha. Escorts Management is actively scouting for strategic partner to divest EAP segment. The Company is looking forward to reduce its losses in EAP segment through cost saving from VRS and better sales portfolio rationalization in FY17. These measures are expected to yield positive results in FY17. Escorts exhibited strong volume growth of 29.5 % YoY with 4,247 units in February. This growth comes on the back of 16.3 % YoY growth in January & 27.4 % YoY growth in Q3FY17. On a YTD basis April-February, Escorts’ domestic tractor volumes have grown at 23 % YoY to 51,581 units against industry growth of 18 % YoY. The management expects to end FY17 at a growth rate of 23 % YoY. In Q1FY8E, the company expects growth to taper down to 10-15 % due to base effect. Pre-demonetisation, the industry was growing a high rate of 20 % YoY. In November, the domestic tractor industry witnessed de-growth of 13 % YoY & single digit growth of 8 % YoY in December. In the same period, Escorts outperformed the industry with flat performance in November & 12 % YoY growth in December. As per the management, the outperformance is attributable to poor winter rains in southern India, where Escorts does not have a strong presence. After a year of strong 20.2 % growth in FY14, domestic tractor sales fell 13 % YoY in FY15 due to poor Kharif harvest & lower Rabi sowing due to dipping reservoir levels. A second consecutive year of deficient rainfall which was 14 % lower than normal impacted agriculture output and led to a decline of the tractor industry by 11 % in 2015-16. In the same period of FY14-16, Escort’s volumes declined at 28 % CAGR. The primary reasons for Escort’s underperformance were gaps in the product portfolio and lack of focus on growing markets like the south & west region that together contribute 47 % of the total market. However, in YTD FY17, Escort’s volumes have outpaced industry volumes, growing 23 % YoY vs. industry growth of 18 %, with market share gain of 0.30 %. This strong growth is on the back of new products launched like 10 new models launched in the last two years, increased focus on opportunity markets of south & west region and separate Powertrac which is its economy brand & Farmtrac brand which is its premium brand in its strong northern market. The management expects industry growth of 18-20 % in FY17E & 6-8 % in FY18E.And can have a tractor volume CAGR OF 10 % in FY17-19E. To improve its visibility, Escorts has also piloted a rental model through tie‐up with the government, which provides capital subsidy for farm equipment. The company is currently testing the model and would gradually scale up if it finds the model right. Exports would be a key area of focus in FY18; ESC has new higher HP models that meet regulatory requirements. The key regions it intends to tap are Africa, Middle East and US. The management believes there is further room of 1.00 % reduction in raw material cost through value engineering. Going ahead in FY18, the monsoon is likely to play a critical role. Yet, as sowing in most regions is healthy, the season would begin on a strong note. Margin expansion through employee cost savings would be a strong lever for earnings growth. EBITDA margin is likely to expand from 4.1 % in FY16 to 10.3 % in FY19 as a result of cost rationalizing. Escorts are taking initiatives to lower raw material costs to 68 % of sales in FY19 from 71 % in FY15 through vendor rationalizing and value engineering. It targets to reduce employee cost to 8.9 % of sales through VRS in the next three years from 12.3 % of sales in FY16. It is expected that the revenue/PAT CAGR of 12 %/40 %, driven by EBITDA margin expansion of 2.80 % to 10.3 % over FY17‐19. At the current market price of Rs. 521.75, the stock is trading at a PE of 23.93 x FY17E and 15.90 x FY18E respectively. The company can post Earnings per share (EPS) of Rs. 21.80 in FY17E and Rs. 32.80 in FY18E. It is expected that the company’s surplus scenario is likely to continue for the next three years keeping its growth story in the coming quarters also.
|SALES (₹ Crs)||3,537.60||4,118.00||4,680.20||5,170.60|
|NET PROFIT (₹ Cr)||77.10||138.20||269.10||349.30|
So, grab a fresh hot cup of coffee, turn on your net & browse on to www.bhavikkshah.blogspot.in & take out few minutes to get to know the most interesting world of investment... Till then HAPPY INVESTING, don't forget to Share !!