Volume outlook to support gains for Escorts stock, infra push is crucial

Topics Escorts Ltd | Escorts | Markets

Despite the strong base, analysts expect the sector to grow at double digits (10 per cent plus) in FY22 with Escorts outperforming its peers
FY21 has been a strong year for tractor makers, as the segment is the only one to post double-digit growth across all segments in the auto space. For Escorts, which gets over 80 per cent of its revenues from this segment, the last year was a record one in which it sold over one lakh tractors registering a growth of 24 per cent.

After a strong March performance which saw its volumes increase 126 per cent year-on-year on a lower base, the company expects tractor demand to remain strong led by higher Rabi output, favourable crop prices and positive initial forecast of 2021 monsoons.

Despite the strong base, analysts expect the sector to grow at double digits (10 per cent plus) in FY22 with Escorts outperforming its peers. The company is expected to further gain market share as it scales up its sales network in the South and West where it has a weaker presence. To tap into the rising demand, the company has also expanded its capacity by 50 per cent over the last year.

In addition to the agri-related demand, analysts at IIFL believe that the government’s focus on infrastructure projects could give non-agri use (haulage) tractors a push especially in the off-farm season. Given that 30-35 per cent of tractor usage is for non-agricultural purposes, infra sector demand could aid tractor volumes in FY22 and FY23, they add.

In addition to the domestic business, volumes are also likely to be aided by exports. For FY21, exports accounted for about 5 per cent of volumes. Given the low base and its tie-up with Japan’s Kubota which will enable the company to tap into Kubota’s global distribution network, the exports business could hit volume growth 20-25 per cent going ahead.

IIFL Research believes that the improvement in margins, return ratios and cash flows are not fully captured in valuations (price to earnings ratio) at 12 times FY23 earnings estimates. Though the stock has more than doubled over the last year, given the volume outlook, improving financial metrics of the company, investors with a long term view could take an exposure to the stock. 



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