Brokerages positive about Escorts Kubota's medium-term growth plans

Near-term worries for the stock include volume uncertainty, premium valuations

The stock of tractor maker Escorts Kubota hit a 52-week high on Monday and has gained 17 per cent over the past fortnight. Brokerages are positive about the company’s strategy for the medium term, announced recently, and which envisages an increase of its revenues by two and a half times by FY28, a higher share of exports, market share improvement, and margin expansion. The medium term business plan outlines a 21 per cent annual growth in revenues to Rs 22,700 crore from Rs 7,152 crore in FY22.

While the railways segment is expected to grow three times, the agriculture and the construction businesses are slated to rise by 2-2.5 times. The share of exports is expected to be a fifth of sales as compared to 6.4 per cent in FY22. The company is eyeing a domestic market share of 18-20 per cent by FY28 up over 600 basis points from the current 12-13 per cent. The gains on the market share front are expected to come from product launches and an expanded portfolio covering 15 horsepower (HP) to 110 HP and doubling of channel presence from the current network of 1,400 dealers.

To improve revenues, enhance its market share and become a base for international operations of its Japanese parent Kubota Corporation (holds 44.8 per cent stake), the company is planning to invest in greenfield facilities which include Rs 2,000 crore for incremental capacities of 130,000 units. The company seeks to improve its return on equity from 12 per cent now to 18 per cent plus over the next 6 years on the back of improving margins and higher asset turnover.
 

Vijay Sarthy TS and Akshay Karwa of Anand Rathi Research expect higher margins in the near term on the addition of premium products in its portfolio, strong volume growth, global sourcing opportunity, and growth in its components business.

In addition to higher dividend payouts, the company is also looking at buybacks by utilising up to 40 per cent of profits.

Emkay Global Research is positive about the prospects of the company. Analysts, led by Raghunandhan NL of the brokerage, have increased their earnings per share estimates for FY24-25 by 1-2 per cent factoring in the positive impact of the amalgamation of Kubota joint ventures.

They expect Escorts, which is one of their top picks in the auto sector, to report annual revenue and earnings growth of 23 per cent and 21 per cent, respectively, over FY22-FY25. Other brokerages such as Motilal Oswal Securities believe that there are near-term challenges for the company.

Analysts led by Jinesh Gandhi at the brokerage say that the uncertainty in the tractor cycle would continue, led by an anticipation of a sharp inventory correction in the December quarter and the adverse impact of the implementation of TREM-4 (tractor emission norms) for greater than 50 HP tractors from January 2023. This, along with a high base of FY23, would keep volume growth under check in the foreseeable future, they add. The brokerage has a neutral rating as the current valuation of 25 times its FY24 earnings is at about twice the 10-year average. Despite volume uncertainty, valuations are already reflecting volume recovery and the benefits of the Kubota partnership, says the brokerage.