Tractor maker Escorts Ltd delivered a poor performance for the quarter ended September. The firm’s net profit was way below Street expectations. It’s no surprise that the stock has corrected by 9.5% since Escorts announced its numbers on 29 November, to Rs186 per share. Over the same period, the BSE-500 index has risen 4%.
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Escorts had an operationally weak September quarter. Its operating margins fell sharply to 4.9% because of a jump in other expenses. According to a research note from Elara Securities (India) Pvt. Ltd, “…there are no one-offs under the head of other expenses while the company has booked some expenses such as MD’s (managing director’s) remuneration and royalty costs in lump sum in the last quarter instead of providing for them over four quarters.” Poor operating performance affected the net profit, which declined sharply by about 55% to Rs27 crore for the September quarter. Thanks to the poor performance last quarter, many analysts have revised their earnings estimates downwards for this fiscal.
For the year as a whole, the performance was much better. Consolidated operating revenue increased at a healthy rate of 27% to Rs3,378 crore. This growth was led by the agri-machinery products business, which increased by 30% and accounted for 73% of the total revenue. The agri-machinery products business benefited from a 32% tractor volume growth to 60,086 units, helped by strong rural demand and new product launches. The construction equipment business and auto ancillary products business, too, performed well in terms of revenue growth.However, the auto ancillary products business posted a loss at the earnings before interest, exceptional items and other unallocated expenditure level. Revenue from the railway equipment business was flattish on account of slowdown in railway orders.
Higher raw material costs dented the operating profit margin, which fell by 70 basis points to 7.2%, from 7.9% last year. Even so, operating profit grew at a decent pace of 16%. Net profit jumped by as much as 355%, from Rs29 crore in the previous year to Rs132 crore. This is because of a decline in interest expenses and depreciation costs.
The stock has outperformed the BSE-500 in the last one year. Some analysts maintain that a portion of the festive season sales moved to the December quarter this year, which should result in strong volume growth in the current quarter. But higher raw material costs might put margins under pressure and keep earnings growth under check.