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This Jhunjhunwala-owned stock can rally another 21%: Analysts

Ace investor Rakesh Jhunjhunwala owns 4.75 per cent stake in Escorts as of December 2020 quarter

Escorts | Rakesh Jhunjhunwala | Buzzing stocks

Saloni Goel  |  New Delhi 

Markets may correct in the short term. But in a bull market the correction is always sharp, swift and short-lived: Rakesh Jhunjunwala

A strong outlook for the tractor industry, on the back of higher farm incomes due to better crop yields and prices, increasing mechanisation and government focus on infrastructure development, bodes well for the tractor-maker and (M&M), according to analysts who see an up to 21 per cent upside in the former following its December quarter numbers.

Escorts, whose stock has rallied 152 per cent since its March low of Rs 527.10 on the BSE, posted an 83.4 per cent year-on-year (YoY) increase in its net profit at Rs 280.7 crore for the third quarter ended December 31, 2020, led by robust sales across business segments. M&M, on the other hand, has gained 232 per cent from its 52-week low hit in March. The S&P BSE Sensex and the BSE Auto indices have gained 94 per cent and 136 per cent, respectively since March lows, ACE Equity data show.

Ace investor owns 4.75 per cent stake in as of December 2020 quarter, according to the shareholding pattern available on the BSE. During the said quarter, he reduced his stake by 0.89 per cent.

Going ahead, while analysts see the tractor volumes for the firm growing, revival in the economy and government spending are likely to boost the revenues for the construction equipment and railway segments. Following Escorts’ Q3 numbers, Kotak Institutional Equities (KIE) maintained a 'BUY' rating on the stock and raised its target price to Rs 1,700 from Rs 1,680 earlier, implying an upside of 21 per cent from the current levels on the BSE. The brokerage said it values the stock at 17 times March 2023E EPS.

Analysts at Phillip Capital and HDFC securities, too, have 'BUY' and 'ADD' rating on with a target price of Rs 1,615 and Rs 1,480, respectively.

Strong tractor demand

Analysts see strong tractor demand to continue in the fourth quarter of FY21 and well into FY22. According to KIE, total tractor volumes for the company will grow at 14.5 per cent YoY in FY2021E and 10.7 per cent in FY2022E. That apart, the company’s Rs 3.3 billion order book from Indian railway with an execution timeline of 6-8 months also gives revenue visibility.

"While pent-up demand is more or less over, farm ecosystem indicators are all positive and hence growth should continue. Furthermore, the non-agri use of tractors (25–35 per cent of sales), which is yet to revive, could support tractor demand in FY22," analysts at Motilal Oswal Financial Services said in a recent note.

The firm on Monday posted a 48.8 per cent YoY jump in at 9,021 units in January 2021. The company during the announcement of sales had said the tractor market continues to be strong on the back of positive macroeconomic factors and strong rural cash flows.

M&M, too, according to Gaurang Shah, head investment strategist at Geojit Financial Services will not only benefit from the growth but also because of its diversifies profile and foray into the passenger vehicle segment.

AK Prabhakar, head of research at IDBI Capital also shares this view. “Given M&M's 40 per cent market shares in the tractor segment, it will be a key beneficiary of the growth in the segment. If Escorts has reported record sales in December quarter, there are similar expectation for M&M, too,” he said.

Downside risks

Despite the positives, analysts caution that Escorts and M&M may witness commodity cost pressures that could impact the margins.

“In Q4FY21, Escorts margins will be impacted by input cost escalation of 5 per cent against which the company has already taken a price hike of 2 per cent in November 2020. The company plans to take another such price hike in the first quarter of FY22,” Motilal Oswal Financial Services said in a recent note.

That apart, steep valuation after a sharp rally since the past few months may limit immediate upside.

“Valuations at 14.5x/13.6x FY22/FY23E consolidated EPS largely reflect strong growth and the Kubota partnership as it is trading at a good premium of 10 per cent to long period average (LPA),” they said while maintaining a 'Neutral' rating on the stock with a target price of Rs 1,470.

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First Published: Wed, February 03 2021. 14:26 IST