After underperforming broader mkt, Escorts zooms back onto investors' radar

Its stock price has risen 13.4% this month, against 2.1% fall in BSE Auto index

After underperforming the broader market and other automakers for nearly a year, tractor and construction equipment maker Escorts is now leading its peers.
 
Its stock price has risen 13.4 per cent since the beginning of August against a 2.1 per cent decline in the BSE Auto index and 6.4 per cent rise in the benchmark BSE Sensex. The stock was also a leader on Thursday, closing the day with gains of 0.2 per cent in a flat market while the auto index was down 0.35 per cent.
 
However, Escorts was a laggard between July 2020 and May 2021. The stock rose just 3 per cent, against a 43 per cent rally in the auto index and 38 per cent rise in the benchmark.
 
Analysts attribute the renewed investor interest in Escorts to expectations of a faster-than-expected recovery in consumer spending in rural India. “Our analysis suggests that rural consumption grew 6.6 per cent year-on-year (YoY) in Q1FY22, against growth of 16.4 per cent YoY seen in Q1FY21. In contrast, urban consumption surged 27 per cent YoY during the last quarter, primarily on a low base of -18 per cent YoY in Q1FY21. In other words, despite the second Covid wave, rural consumption continued to grow in Q1FY22,” write analysts at Motilal Owsal Securities.
 
As a leading tractor maker, Escorts is expected to be a big gainer. Tractor and farm equipment division accounted for 82 per cent of its consolidated revenues and 90 per cent of its net profits in FY21.
 
The company has also managed to grow its market share. Escorts’ revenue from tractor and farm equipment has risen 43 per cent in the last three years against 13 per cent growth reported by industry leader Mahindra & Mahindra’s farm equipment division. Analysts say that Escorts has the headroom to raise its market share further, given its small share. It still accounts for 10 per cent of industry revenues against M&M’s 45 per cent and Tafe’s 18 per cent. Escorts also has a small presence in construction and railway equipment.

This has prompted many brokerages to upgrade Escorts’ earnings for FY22 and raise its target price. Kotak Institutional Equity has put a ‘buy’ rating on the stock with a target price of Rs 1,700, nearly 27 per cent upside from the current level. The brokerage also believes Escorts’ current price to earnings at around 19X is quite attractive.
 
The company, however, faces headwinds from the rise in industrial metals prices, especially steel. Its operating margin was down around 100 basis point (bps) sequentially in Q1FY22, though it was still up YoY. The company also reported a sequential decline in revenues due to the second wave.
 
The tractor industry also faces headwinds from the prospect of a deficient monsoon this year. Escorts’ lower than industry valuation ratio, however, provides adequate downside protection to prospective investors.