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Escorts,one of Indias leading agri-machinery companies,is our new buy with a SoTP-based PO of Rs 166. Our investment opinion is driven by structural demand for tractor business (85% of companys sales). We also expect non-agri operations (railway equipments,auto parts) to be less of a drag,and construction equipment business to unlock value in the long term.
As a result,we forecast 21% EPS CAGR over 2010-13E. On our sum-of-the-parts based methodology,we value the tractor business at 10x March 2012E EPS (20% discount to industry leader M&Ms target multiple) and construction equipment business at R16 (7x March 2012E EV/Ebitda).
We believe Escorts,which ranks third in market share,is in the middle of a structural growth due to increasing mechanisation,growing affordability and rising labour shortage in rural India. We expect Escorts to achieve higher-than-industry tractor sales CAGR of 15% over the next two years,on new launches such as inverter-tractor,etc, and marketing initiatives in south India,where it lags compared to other regions.
Escorts Construction Equipment (ECEL),the companys wholly owned subsidiary,has built its leadership in the niche segment of pick n carry cranes. ECEL is now focusing on front/backend loaders and with recent launch of newer products,we expect it to achieve significant scale via 16% revenue CAGR in 2010-13E,and double Ebitda margin to 6%. We expect Escorts to be free cash flow positive this fiscal,turn debt-free next year and improve RoE. Based on superior prospects,we expect the companys stock valuations to improve from P/E of 7x & P/B of 0.6x (on March 2012E). However,poor agricultural growth may hit tractor demand. Escorts derives about 70% of its consolidated revenues from its tractor business.
Merrill Lynch
