Escorts: ordeal with non-tractor businesses continues
Escorts delivered strong growth in the September quarter as revenues were up 21.7%, operating profit and net profit more than doubled; however, the story at its non-tractor businesses was dismal
Shares of Escorts Ltd doubled over the past year as tractor sales recovered, the company realigned its cost structure, and went on to restructure its money-losing auto ancillary and construction equipment divisions. Tractor sales in the September quarter were up 35%. So far this fiscal year, they have risen 21%, compared to a 20% drop a year ago.
As sales gained traction and the management alluded to the impending turnaround of the construction equipment business and sold part of the loss-making auto products division, the stock was re-rated. So much so that the company’s current fiscal year valuations topped that of Mahindra and Mahindra Ltd.
Escorts delivered strong growth in the September quarter. Revenues were up 21.7%. Operating profit and net profit more than doubled. But the story at its non-tractor businesses was dismal.
Operating profit margin at the tractor business softened from the June quarter due to a one-time expense. Growth in the railway business stalled. The construction business reported a meagre 2% revenue growth. Worse, operating losses at the construction and auto parts divisions widened from a year ago.
To be sure, Escorts derives only a fifth of its revenues from its non-tractor businesses. But continuing losses at these divisions are suppressing core business earnings.
For instance, the tractor business generated an operating profit (earnings before interest and tax) of Rs74.5 crore in the second quarter. But operating profit at the company level fell below Rs70 crore due to losses at the auto and construction divisions. Expectedly, investors were unimpressed and sent the stock lower by 5% on BSE on Thursday.
Post the divestment of the auto component unit, the company plans to discontinue the rest of the auto business, says Bharat Madan, group financial controller at Escorts. So the pain of the auto business may be over by the end of the current fiscal year. Further, aided by better sales, he expects the tractor business to record double-digit margins and the construction business to break even in the rest of the fiscal year.
While improvement in the tractor business margins will address concerns about profitability, turning around the construction division is proving to be a challenge.
Despite the management’s pep talk, volumes at the business haven’t recovered for two years now.
A break-even at this unit will help Escorts conserve earnings and drive further gains in the stock.