BackSustained upward cycle in tractors lifts Escorts’ performance
The outlook on profitability is positive and will be driven by improving product mix and new launches
Premium(What will augur well for Escorts is improvement in the market share, which is at around 10%. )
Escorts Ltd’s December quarter result mirrors the revival in demand for farm equipment, partly driven by improved crop cultivation and production and pent-up demand for tractors. This segment comprises nearly 80% of the company’s revenue, which rose by 12.7% to ₹ 1,159.6 crore. A marginal price hike in the latter part of the December quarter also propped up realizations.
Lower inventory levels typical of this quarter, where sales are better than in the preceding quarter, translated into a 6.1% operating margin, up 100 basis points from the year-ago period. One basis point is one-hundredth of a percentage point.
More importantly, the improved financial position in the farm segment eased cash flows and working capital cycles, which in turn trimmed interest costs.
The outlook on profitability is positive and will be driven by improving product mix and new launches, besides the company’s attempt to improve market reach. The stock has already rallied in the past one year following forecasts of a cyclical improvement in the farm-equipment sector. Escorts’s shares rose 78% in one year and outperformed the S&P BSE Mid-cap index, which contracted 10%.
Management confidence on improving fortunes in the coming quarters stems from better sales in key markets in the country’s northern and central regions. But what will augur well for Escorts is improvement in the market share, which is at around 10%. Note that the firm sold 11.4% more tractors this quarter than in the year-ago period, far less than the industry growth rate of 28.3%.
Given the stellar rise in the share price, any further improvement will come from a better product mix and realizations, which will improve the profit margin.
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