Karvy- Escorts Construction Business Drags Margins

Automobiles May 29, 2014

Escorts

Bloomberg: ESC IN Reuters: ESCO.BO

BUY

Institutional Equities

India Research

RESULT REVIEW

Recommendation

CMP: Rs127

Target Price: Rs165

Previous Target Price: Rs165

Upside (%) 30%

Stock Information Market Cap. (Rs bn / US$ mn) 16/271

52-week High/Low (Rs) 145/59

3m ADV (Rs mn /US$ mn) 263/4.5

Beta 1.3

Sensex/ Nifty 24,693/7,367

Share outstanding (mn) 123

Stock Performance (%) 1M 3M 12M YTD

Absolute 1.7 10.4 113.2 (6.2)

Rel. to Sensex (5.8) (7.5) 69.9 (19.6)

Performance

Source: Bloomberg

Analysts Contact Mitul Shah

+91 22 6184 4312

[email protected]

Maruti Kadam - Associate

022 - 6184 4322

[email protected]

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Sensex (LHS) Escorts

Construction Business Drags Margins; Expect

Recovery in FY15E – Reiterate BUY

Escorts’ quarterly performance on operational front came below ours as well

as street expectations in the quarter ended Mar’14. Its revenues declined 2%

YoY & 15% QoQ to Rs. 9.8 bn (vs. our estimate of Rs. 9.9 bn) despite volume

growth of 5% YoY. Decline in Spare business and Construction Equipment

business dragged overall revenue despite agri segment growing by 6% YoY.

Moreover, higher losses in the other businesses coupled with lower

profitability of Agri-Machinery segment dragged Escorts’ overall margins. Its

EBIDTA margins fell 77 bps YoY & 146 bps QoQ to 4.7% (vs. our estimate of

5.3%). The Company’s lower interest outflow resulted in higher PBT. Escorts’

adjusted PAT declined 25% YoY & 40% QoQ to Rs. 274 mn (vs. our estimate

of Rs. 308 mn. Its adjusted EPS stood at Rs. 2.3 (vs. our estimate of Rs. 2.6).

Construction Equipment Biz to Recover in FY15E…Margins to Improve

from Current Level: Currently, the domestic tractor industry has been

witnessing near term slowdown, while Southern & Western regions have been

improving since past six months. Escorts’ market shares in these regions are

weaker traditionally, so we expect it to underperform. However, with

expectation of strong economic recovery we expect strong revival in

company’s construction equipment business and losses to come down

significantly benefitting overall margins of the company.

Outlook & Valuation

Company has extended its financial year by six months and reported its FY13

financials for eighteen months. Accordingly, we change our estimates from

Sep-ending financials to March-ending for FY15 and FY16. We expect Escorts

to report an EPS of Rs. 17.1 and Rs 20.6 on revenues of Rs. 44.4 bn and Rs 50.9

bn in FY15E and FY16E respectively. We maintain our target price of Rs. 165

per share, valuing it at 8x FY16E EPS. Currently, the stock trades at P/E of

6xFY16E. In view of expected recovery in its construction equipment business

and valuation comfort, we reiterate our “BUY” recommendation on Escorts.

Key Financials (Standalone)

Y/E Mar (Rs. mn) Sep-11 Sep-12 Mar-14P Mar-15E Mar-16E

Net Sales 32,382 38,939 62,915 44,415 50,888

EBITDA 1,481 1,822 3,812 3,138 3,591

EBITDA margin (%) 4.6 4.7 6.1 7.1 7.1

Adj. Net Profit 1,201 692 2,416 2,039 2,458

EPS (Rs.) 11.7 5.8 20.3 17.1 20.6

ROE (%) 7.0 4.2 14.3 10.7 11.7

ROCE (%) 9.3 7.2 16.3 11.0 12.1

PER (x) 10.7 21.5 6.2 7.3 6.1

P/BV (x) 0.7 1.0 0.8 0.8 0.7

Source: Company, Karvy Institutional Research

*Note: Escorts recently changed its accounting financial year from Sept-end to March-end,

therefore, Mar-14 includes financials of eighteen months (Oct-2012 to Mar 2014) YoY

comparison for FY13 and FY15 is not meaningful.

2

May 29, 2014

Escorts

Key Takeaways of Conference Call:

Miniscule Presence in Weaker Market Impacted Volume: According to

Escorts’ Management, Southern & Western regions have been witnessing ~25%

growth compared to overall industry growth of ~10% and nearly flat growth

in Northern region. Escorts has a very small presence in Southern and Western

regions with market share of ~3.5-4%. This resulted in lower-than-industry

growth for Escorts, as the Company has weaker position in these markets, so it

couldn’t take benefit of strong revival from South & Western regions.

Sharp Drop in Operating Performance of Other Business Draged Overall

Margins: Escorts’ other businesses (other than Agri machinery business)

delivered disappointed performance with Ancillary business recording 31%

YoY decline in revenues to Rs. 305 mn & Construction Equipment segment

plummeting by 34% YoY to Rs. 1,105 mn, which resulted in decline of 2% YoY

in overall revenues, compared to 6% YoY growth in agri-machinery business.

Moreover, construction business reported negative operating margins of 9% in

Mar’14 as compared to -0.5% reported in year ago period. This dragged overall

margins by 77 bps YoY and 146 bps QoQ to 4.7% in the quarter.

Loss Making Segments Eat Away 20% of Agri machinery profit: Escorts’

operating profit (EBIT) declined 22.6% YoY, due its Auto Ancillary &

Construction Equipment segments recording operational (EBIT) loss to the

tune of Rs. 71 mn & Rs. 99 mn, respectively during the quarter, which together

eroded 20% of the operating profit (Rs 630 mn) of agri-machinery segment in

the quarter.

Focus on Higher HP & Exports: The Company is more focused on higher HP

segment, particularly 45-50 HP & >50 HP segment. Its Management expects

improvement in its market share due to demand for higher HP tractors.

Company has added ~285 new dealers over last 12 months as a part of

strategic initiative to improve market shares. It also aims to continue focus

more on >45HP segment. Management also increased its focus on exports

market with new launches. It has guided for 100% CAGR in exports volumes

over next 2 years.

Management Lowers Guidance and Indicates Tough Market Situation:

Management has lowered its tractor industry volume growth from earlier 8-

10% to 4-5% in FY15E. Overall market condition has deteriorated over past 2-3

months post untimely monsoon and storm in few regions. Discount level has

also increased to the tune of Rs 25,000-30,000 per vehicle recently, signaling

increasing competitive pressure.

Dividend, Debt & Capex: The Company’s current debt stands at ~Rs. 3.5 bn.

Its Management indicated its annual capex to the tune of Rs. 0.8-0.9 bn.

Company has declared a dividend of 18% i.e. Rs 1.80 per share for the fiscal

ended on Mar’14.

3

May 29, 2014

Escorts

Exhibit 1: Escorts (Standalone) P&L – Quarterly Analysis

YE Mar (Rs. mn) Mar’ 14 Mar’ 13 YoY (%) Dec’ 13 QoQ (%)

Total Revenue 9,829 10,006 (1.8) 11,596 (15.2)

Less:

Net Raw Material consumed 7,073 7,225 (2.1) 8,400 (15.8)

Advertisement and sales promotion Exp. 1,184 1,122 5.6 1,342 (11.8)

Personnel 1,114 1,117 (0.3) 1,144 (2.6)

Total Expenditure 9,371 9,464 (1.0) 10,886 (13.9)

EBIDTA 458 543 (15.6) 710 (35.5)

Less: Depreciation 152 131 16.4 145 4.9

EBIT 305 412 (25.8) 565 (45.9)

Less: Net Interest 135 217 (38.0) 155 (13.2)

Add: Other income 110 111 (0.3) 158 (30.4)

Profit Before Extra-ordinary items &Tax 281 305 (7.9) 568 (50.5)

Less: Total Tax 8 (62) NA 112 (92.9)

Less: Extraordinary Expense (net) (45) (7) NA 0 NA

Profit After Tax 318 375 (15.2) 456 (30.2)

Adj. PAT 274 366 (25.1) 456 (39.8)

Reported EPS (Rs.) 2.67 3.14 (15.2) 3.82 (30.2)

Adj. EPS (Rs.) 2.30 3.07 (25.1) 3.82 (39.8)

Margin Analysis (%)

Change

in bps

Change

in bps

EBIDTA Margin 4.7 5.4 (77) 6.1 (146)

Adj. NPM 2.8 3.7 (87) 3.9 (114)

Effective Tax Rate 2.8 (20.4) NA 19.8 (1,694)

Cost Analysis

RM/Net Sales 72.0 72.2 (24) 72.4 (48)

Adv.& Sales Promotion Expenses./Net Sales 12.0 11.2 84 11.6 48

Personnel/Net Sales 11.3 11.2 17 9.9 147

Source: Company, Karvy Institutional Research; NA: Not Applicable

Exhibit 2: Quarterly Segmental Revenue Break-up (%)



Agri

machinery

74.5

Auto

ancillary

4.4

Railway

equipment

4.5

Construction

equipment

16.5

Others

0.1

Mar' 13

Agri

machinery

81.0

Auto

ancillary

3.1

Railway

equipment

4.6

Construction

equipment

11.2

Others

0.2

Mar' 14

4

May 29, 2014

Escorts

Exhibit 3: Segmental Financials

Segment wise Revenue (Rs. Mn): Mar' 14 Mar' 13 YoY (%) Dec' 13 QoQ (%)

Agri machinery products 8,022 7,560 6.1 9,720 (17.5)

Auto ancillary products 305 443 (31.1) 294 3.8

Railway equipment 451 456 (1.0) 332 35.8

Construction equipment 1,105 1,674 (34.0) 1,309 (15.6)

Others 16 11 48.7 11 50.4

Total 9,900 10,144 (2.4) 11,666 (15.1)

Segment Result (EBIT):

Agri machinery products 630 647 (2.7) 918 (31.4)

Auto ancillary products (71) (22) 225.3 (94) (24.7)

Railway equipment 45 35 28.9 13 249.8

Construction equipment (99) (8) 1,174.6 (26) 275.3

Others (2) (3) (22.0) (2) (7.6)

Total 503 650 (22.6) 808 (37.8)

Operating Margins (%)

Change

in bps

Change

in bps

Agri machinery 7.9 8.6 (71) 9.4 (159)

Construction equipment (9.0) (0.5) (849) (2.0) (694)

Overall 5.1 6.4 (133) 6.9 (185)

Source: Company, Karvy Institutional Research; NA: Not Applicable

Exhibit 4: Quarterly Revenue Break up

Source: Company, Karvy Institutional Research; Y/E Sep.

Exhibit 5: Segmental Margin Trend

Source: Company, Karvy Institutional Research; Y/E Sep.

Exhibit 6: Adjusted Financials

(Rs. mn) Adj Mar - 13 Adj Mar - 14 Mar-15E Mar-16E

Net Sales 38,660 42,627 44,415 50,888

EBITDA 2,079 2,740 3,138 3,591

EBITDA margin (%) 5.4 6.4 7 7

Adj. Net Profit 1,025 1,755 2,039 2,458

EPS (Rs.) 8.6 15.0 17 21

YoY growth (%) - 74.1 13.7 20.6

Source: Company, Karvy Institutional Research; Adj Financials are for 12 months ending March i.e. Adj Mar’13 = Apr’2012 to March 2013.

20.0 23.4 15.5 16.1 12.4 16.5 9.2 12.1 11.2 11.2

74.0 68.5 76.6 75.5 81.3 74.5 83.0 79.2 83.3 81.0

0%

20%

40%

60%

80%

100%

Dec

' 11

Mar

' 12

Jun

' 12

Sep

' 12

Dec

' 12

Mar

' 13

Jun

' 13

Sep

' 13

Dec

' 13

Mar

' 14

Construction equipment Others Railway equipment

Auto ancillary products Agri machinery products

(10.0)

(5.0)

-

5.0

10.0

15.0

Dec

' 11

Mar

' 12

Jun

' 12

Sep

' 12

Dec

' 12

Mar

' 13

Jun

' 13

Sep

' 13

Dec

' 13

Mar

' 14

Agri machinery Construction equipment Overall

(%)

5

May 29, 2014

Escorts

Financials

Exhibit 7: Profit & Loss Statement (Standalone)

Y/E Mar (Rs. mn) Sep-11 Sep-12 Mar-14 Mar-15E Mar-16E

Net revenues 32,382 38,939 62,915 44,415 50,888

Operating expenses 30,901 37,116 59,103 41,277 47,297

EBIDTA 1,481 1,822 3,812 3,138 3,591

EBIDTA margin (%) 4.6 4.7 6.1 7.1 7.1

Other income 387 478 814 520 572

Interest 558 964 1,107 470 425

Depreciation 380 484 832 640 666

Profit Before Tax 1,006 880 2,724 2,548 3,072

Tax (195) 184 275 510 614

Reported Net Profit 1,201 696 2,449 2,039 2,458

Net Margin (%) 3.7 1.8 3.9 4.6 4.8

Adjusted Net Profit 1,201 692 2,416 2,039 2,458

Adj. Net Margin (%) 3.7 1.8 3.8 4.6 4.8

Source: Company, Karvy Institutional Research *Note: *Note: Escorts recently changed its accounting

financial year from Sept-end to March-end, therefore, Mar-14 includes financials of eighteen months

(Oct-2012 to Mar 2014) YoY comparison for FY13 and FY15 is not meaningful.

Exhibit 8: Balance Sheet (Standalone)

Y/E Mar (Rs. mn) Sep-11 Sep-12 Mar-14E Mar-15E Mar-16E

Equity capital 1,023 1,193 1,193 1,193 1,193

Reserves & surplus 16,962 14,947 17,246 19,077 21,285

Shareholders’ funds 17,985 16,140 18,439 20,270 22,478

Total Loans 2,858 4,599 3,499 2,499 1,799

Deferred tax liability -164 28 -74 -74 -74

Total Liabilities and Equity 20,679 20,767 21,865 22,695 24,204

Gross block 21,411 22,963 24,178 25,448 26,768

Depreciation 6,792 7,100 7,932 8,572 9,238

Net block 14,619 15,863 16,245 16,875 17,529

Capital WIP 453 665 550 480 360

Investments 3,658 3,859 3,821 3,821 3,821

Inventory 3,274 4,966 5,505 5,654 6,479

Debtors 3,405 4,454 3,447 4,381 5,019

Cash & Bank Bal 2,034 1,306 1,628 2,371 2,911

Loans & Advances 3,765 3,075 3,514 3,218 3,842

Current Assets 12,478 13,801 14,095 15,624 18,251

Sundry Creditors 7,020 8,846 8,582 9,612 11,014

Other Current Liability 1,097 1,987 1,987 1,987 1,987

Current Liability& Provisions 10,528 13,420 12,847 14,105 15,757

Net current assets 1,950 381 1,249 1,519 2,493

Total Assets 20,679 20,767 21,865 22,695 24,204

Source: Company, Karvy Institutional Research *Note: *Note: Escorts recently changed its

accounting financial year from Sept-end to March-end, therefore, Mar - 14 includes financials of

eighteen months (Oct-2012 to Mar 2014) YoY comparison for FY13 and FY15 is not meaningful..

6

May 29, 2014

Escorts

Exhibit 9: Cash Flow Statement (Standalone)

(Rs. mn) Sep-11 Sep-12 Mar-14E Mar-15E Mar-16E

EBIT 1,101 1,338 2,980 2,498 2,925

Other Income 387 478 814 520 572

Depreciation & Amortisation 380 484 832 640 666

Interest paid(-) (558) (964) (1,107) (470) (425)

Tax paid(-) 195 (184) (275) (510) (614)

Extra Ord Income 76 28 36 0 0

Operating Cash Flow 1,581 1,180 3,281 2,679 3,124

Change in Working Capital 285 841 (546) 472 (434)

Cash flow from Operations 1,865 2,021 2,736 3,151 2,689

Capex (740) (1,940) (1,100) (1,200) (1,200)

Strategic Investment 0 (155) 38 0 0

Non Strategic Investment (0) (46) 0 0 0

Cash flow from Investing (740) (2,141) (1,062) (1,200) (1,200)

Change in borrowing (128) 1,741 (1,100) (1,000) (700)

Others (523) (2,178) (2) 0 0

Dividends paid(-) (184) (171) (250) (208) (250)

Cashflow from Financial

Activities (835) (608) (1,351) (1,208) (950)

Change in Cash 290 (729) 322 743 540

Opening cash 1,744 2,034 1,306 1,628 2,371

Closing cash 2,034 1,306 1,628 2,371 2,911


Exhibit 10: Key Ratios

Sep-11 Sep-12 Mar-14E Mar-15E Mar-16E

Revenue Growth 17.5 20.2 61.6 -29.4 14.6

EBITDA Margin 4.6 4.7 6.1 7.1 7.1

Net Profit Margin 3.7 1.8 3.8 4.6 4.8

ROCE (%) 9.3 7.2 16.3 11.0 12.1

ROE (%) 7.0 4.2 14.3 10.7 11.7


Exhibit 11: Valuation Parameters

(Rs. mn) Sep-11 Sep-12 Mar-14E Mar-15E Mar-16E

EPS( Rs) 11.7 5.8 20.3 17.1 20.6

P/E (x) 10.7 21.5 6.2 7.3 6.1

P/ BV (x) 0.7 1.0 0.8 0.8 0.7

EV/ EBITDA (x) 9.2 10.0 4.4 4.8 3.8

Fixed Assets Turnover Ratio (x) 2.1 2.4 3.8 2.6 2.9

Debt / Equity (x) 0.2 0.3 0.2 0.1 0.1

EV/ Sales (x) 0.4 0.5 0.3 0.3 0.3

Source: Company, Karvy Institutional Research *Note: *Note: Escorts recently changed its

accounting financial year from Sept-end to March-end, therefore, Mar-14 includes financials of

eighteen months (Oct-2012 to Mar 2014) YoY comparison for FY13 and FY15 is not meaningful..

Institutional Equities Team Rahul Sharma

Head – Institutional Equities /

Research / Pharma +91-22 61844310 [email protected]

Gurdarshan Singh Kharbanda Head - Sales-Trading +91-22 61844368/69 [email protected]

INSTITUTIONAL RESEARCH

Analysts Industry / Sector Desk Phone Email ID

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INSTITUTIONAL SALES

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INSTITUTIONAL SALES TRADING & DEALING

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For further enquiries please contact:

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Disclosures Appendix

Analyst certification

The following analyst(s), who is (are) primarily responsible for this report, certify (ies) that the views expressed

herein accurately reflect his (their) personal view(s) about the subject security (ies) and issuer(s) and that no part of

his (their) compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views

contained in this research report.

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Stock Ratings Absolute Returns Buy : > 15% Hold : 5 - 15% Sell : < 5%

Documents

Karvy- Escorts Construction Business Drags Margins