Shares of Escorts Kubota (formerly Escorts) moved 6 per cent higher to Rs 2,156.70 on the BSE in Monday’s intra-day trade in an otherwise weak market on a strong growth outlook. The stock of the tractor maker was trading close to its record high of Rs 2,189.75, touched on September 23, 2022.
Escorts Kubota has diversified business across three different verticals, agri machinery, construction equipment & railway equipment division.
In a recent analyst meet, Escorts Kubota’s management re-iterated its robust medium term growth prospects. FY28 revenue target is at Rs 22,700 crore as against Rs 7,200 in FY22, implying a 21 per cent CAGR, driven by amalgamation with Kubota JVs, ramp-up of vehicle/component exports, and continuing growth in domestic businesses.
Profitability remains a key focus area with an FY28 ROE target of 18 per cent plus as against 12 per cent in FY22, led by better margins and asset turnover. The management targets EBITDA margins to reach mid-teens. It also plans to increase dividend payout and do buy-backs by utilizing up to 40 per cent of profits.
Led by tractor sales upcycle and opening of new revenue streams due to the support of the new joint promoter, Kubota, analysts at Emkay Global Financial Services expect Escorts to report robust revenue/EPS CAGR of 23 per cent/21 per cent over FY22-25E.
“We came away impressed with the cultural shift, which Escort Kubota is seeing imbibing the best practices at Kubota and leverage opportunities that it sees to cross-sell across each other’s network as well as development of the company as one of the sourcing hubs for Kubota. It also shared a prudent capital allocation strategy wherein majority of cash would be used for growth capex with return of the same to shareholders (dividend+ buyback),” ICICI Securities said in a note.
Escorts Kubota has intensified its focus on comprehensive growth across its business verticals. While the mid-term growth strategy seems to be in the right direction, we would watch for its effective execution, said Motilal Oswal Financial Services (MOFSL).
Seamless execution in targeted areas such as market share gains in the domestic tractor industry, growth in exports through Kubota channel, benefits of sourcing/localization, and recovery in margins (in-turn) would be the key monitorables, the brokerage said.
However, in the near term, MOFSL believes uncertainty in the tractor cycle would continue led by an anticipation of a sharp inventory correction in Q3 and the adverse impact of implementation of TREM-4 norms for >50HP tractors from Jan-23. This, along with a high base of FY23, would keep volume growth under check in the foreseeable future. Faster recovery in other businesses and a ramp-up in its partnership with Kubota would dilute the impact of a weaker tractor cycle on Escorts.
The stock trades at 24.9x consolidated FY24E EPS, at a premium to its 10-year average of 12.6x, driven by an improvement in operating parameters as well as the Kubota partnership. While the tractor cycle seems to be uncertain, the valuations are already reflecting volume recovery as well as the benefit of Kubota partnership, MOFSL said.