Escorts: Strong volume growth across its three segments aid Q4 show

Growth and margin profile are expected to be strong in FY19 on rising rural demand, product mix and cost efficiencies

Helped by strong volume growth across its segments of tractors, railways and construction equipment, Escorts reported a 40 per cent year-on-year (y-o-y) jump in revenues for the March quarter (Q4). The performance, marginally lower than estimates, was led by the tractor segment, which accounts for three-quarters of the firm’s revenues and over 86 per cent of the segment’s profits. 

Tractor volumes were up 57 per cent y-o-y, though realisations came in lower compared to Q3, given the launch of products in the lower horse power and compact segments. But, margins for the segment continued to increase, with gains of 500 basis points (bps) in Q4 to 15.1 per cent. Margins for the segment for the full year came in at 13.6 per cent and the company believes there could be a 100 bps gain on the back of operating leverage as well as market share gains. 

Going ahead, given the expectation of a normal monsoon, growth prospects of the tractor industry, up 22 per cent in FY18, is expected to grow in the 9-11 per cent range in FY19. While Escorts grew at a faster rate of 26 per cent in FY18, growth in the current fiscal, too, is expected to be strong on the back of normal rainfall, higher farm incomes and a pick-up in rural consumption. Growth rates for the sector and the firm would come down, given the record volumes in FY18 (high base) and the challenge for Escorts to grow its markets in under-penetrated areas as well as non-stronghold markets. 

Growth in the construction equipment segment, too, was strong with revenues up 44 per cent y-o-y for Q4 and 35 per cent for FY18. Margins for the segment doubled to 5 per cent in Q4. The management indicated the overall industry will grow at 16-18 per cent and the firm is expected to outperform in the areas it is present in. Revenue growth for railway equipment, too, were up 14 per cent while segment profits were up 68 per cent. At 15.9 per cent, this segment is the highest margin business for the firm and gains here (margins gained 500 bps y-o-y) added to overall margins.