Escorts scrip bounces back to register 19% rise on seasonal tractor demand

Even as the sector's volumes fell by 1% over the year-ago period due to heavy rains, Escorts reported 2% increase. The near-term outlook for the sector remains strong

Even as auto stocks continue to feel the pressure of falling volumes and muted outlook, the Escorts scrip has bounced back over the past three weeks to register gains of 19 per cent. Led by seasonal demand for tractors, the company was the only one in the listed space to report year-on-year (YoY) volume growth in September. Even as the sector’s volumes fell by 1 per cent over the year-ago period due to heavy rains, Escorts reported 2 per cent increase. The near-term outlook for the sector remains strong. 

Naveen Kumar Dubey and Swati Singh of Narnolia Financial Advisors believe that good monsoons, reservoir levels, and crop prices will help improve demand sentiment in the festive season for tractors. Volumes in the sector are looking up after two consecutive quarters of decline. This should help Escorts, which derives over 75 per cent of its revenue from the sale of tractors. In addition to festival demand, growth for the company is expected to come from new hybrid technology products launched last month. Further, the company has been gaining market share over the past six months, with its sales falling less than that of the industry. The company reported a 10 per cent decline in the first half of the financial year, while some of its peers have recorded a fall in excess of 11 per cent. 

In addition to volume trends, the next trigger for the stock would be the September quarter results. While tractor volumes in the quarter were down 6 per cent, revenue decline is expected to be limited to 3 per cent, given the improvement in realisations on the back of price hikes taken earlier. Margins are expected to fall 150 basis points YoY to under 10 per cent due to inferior product mix, higher incentives, or promotional expenses. The Street will also keep an eye out for demand situations in the construction equipment segment and order book execution in the railways division.

With improvement in volumes in the second half led by good monsoon and benefits from a cut in corporate taxes, most brokerages have increased their earnings per share estimates by 10-20 per cent over 2019-20 and 2020-21. Given the triggers, especially in the tractor segment, investors can add the stock to their portfolios.