Recovery is still a work in progress at Escorts
The company expects tractor sales volume to recover only in the second half of the current fiscal, that too aided by favourable base
Tracking the weak agrarian economy, tractor sales volume at Escorts Ltd slumped 29% in the March quarter. But the company managed to mitigate the impact of this sharp drop in volume. Revenue fell by less than 17%. The impact was mitigated by the construction equipment division, revenue of which increased 19% on better volumes. Also better execution led to a 21% rise in railway division revenue.
Raw material costs continued to soften. As part of the restructuring, the company reduced the number of employees, helping lower personnel cost. But a sharp drop in tractor volume reduced economies of scale, leading to a 52% fall in operating profit or Ebitda. Earnings were also hit by continuing losses at the auto ancillary and construction divisions, though they were much reduced from the year-ago quarter.
The performance, however, is in line with analysts’ estimates, which sent the stock up 3.28% on Thursday. The company benefited from a sharp improvement in profitability at the railway division. With the new railway minister speeding up the decision-making process, it expects the railway division to maintain the current positive momentum in revenue and operating profit. The division is introducing new products which offer better margins. “We have seen improvement in the railways business as the government has started clearing logjams that had slowed the process of modernization," Rajan Nanda, chairman of Escorts, said in a statement.
Prospects of the other two businesses, though, remains weak. The company expects tractor sales volume to recover only in the second half of the current fiscal, that too aided by favourable base. It is seeing good demand for high-powered tractors of above 50 horse power. But their share in overall sales at present is quite low.
Similarly, in the construction division the management expects sales to improve only from the third quarter onwards. Even though several projects are being announced, the company is not seeing any noticeable improvement in spending. As a result, both the tractors and construction equipment divisions are running at sub-optimal levels.
Overall, the first half of 2015-16 or the current fiscal year can remain unexciting for Escorts. The company expects to see significant improvement in profitability in the current fiscal year. The benefits of the recent fall in raw material prices and restructuring efforts are expected to play out in the current year, the management told analysts. While that should provide some comfort to investors, recovery is still a work in progress at Escorts.
The writer does not own shares in the above-mentioned companies.
Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away! Login Now!