Escorts Ltd’s consolidated financial performance for fiscal 2011 (FY11) reflects the adverse impact of higher raw material costs, continued Ebit (earnings before interest and tax) loss of the auto ancillary products business and more than doubling of interest costs. The tractor manufacturer follows an October-September fiscal year.
The company’s profit before tax and exceptional items in FY11 fell 32% year-on-year (y-o-y) to Rs 120 crore. Higher interest rates and an increase in debt led to a 105% increase in interest expense, which affected the firm’s profitability.
That’s when the total operating revenue had increased 22% to Rs 4,123 crore. Revenue growth was mainly driven by the strong performance of the construction equipment business. The agri-machinery products business, too, delivered decent revenue growth.
However, total raw material costs as a percentage of revenue increased by 362 basis points (bps) leading to a 232 bps dip in operating profit margin to about 5%. One basis point is one-hundredth of a percentage point. Operating profit, thus, declined by about 17%. Meanwhile, Escorts’ stand-alone September quarter financials show an improvement in performance compared with the June quarter. Revenue increased 14.5% over the same period last year and 4.4% sequentially, to Rs 772 crore. While its tractor sales volumes have improved sequentially, price realizations have declined.
“A 9% y-o-y tractor volume growth at a time when the industry as a whole has been buoyant (M&M tractor volumes up 26% y-o-y during the quarter), suggests that the company is facing headwinds in its specific product category (higher hp—horsepower—tractors) or geography (northern markets),” according to analysts from Antique Stock Broking Ltd. M&M is Mahindra and Mahindra Ltd.
For the September quarter, the reported net profit declined sharply by 70% y-o-y to Rs 8 crore because the company had an exceptional item worth Rs 9.9 crore.
In the last one year, the Escorts stock has underperformed the BSE-500 index. Currently, at Rs 80 per share, it trades at about 6.3 times its estimated earnings for the current fiscal (September year-ending).
While valuations may seem attractive, the triggers for outperformance appear limited going forward. Moreover, the near-term outlook is challenging for the company on account of the low tractor demand in north and east India, according to analysts.
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