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Business News/ Market / Mark-to-market/  Escorts: Rural demand props up Q4, other businesses do well too
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Escorts: Rural demand props up Q4, other businesses do well too

But Escorts shares did not react favourably to the excellent Q4 result. This may be because the overall revenue and profit was just in line with expectations

In Escorts Q4 FY18 result, Ebitda nearly doubled to Rs173.8 crore. And profit after tax too revved up one-and-a-half times from the year-before level. Graphic: MintPremium
In Escorts Q4 FY18 result, Ebitda nearly doubled to Rs173.8 crore. And profit after tax too revved up one-and-a-half times from the year-before level. Graphic: Mint

That Escorts Ltd would stage a strong performance in the March quarter (Q4), especially for its agri-machinery division, was well known. What came as a pleasant surprise to investors was the revenue and profit margin growth in the other two divisions—railway equipment and construction equipment.

Together, the three divisions’ stellar revenue growth of 37% drove up profitability. Ebitda (earnings before interest, tax, depreciation and amortization) margin skyrocketed by 483 basis points to 12.1%, when compared to the year-ago period. The agri-machinery division, whose sales account for about three-fourths of consolidated revenue, was blessed for the last several quarters by favourable monsoon rains that improved demand for tractors and farm equipment. Not only did the segment’s revenue more than double, its profitability leapt too.

An equally strong jump in margins of railway equipment supported overall growth. Until a few quarters back, this division was making losses. The construction equipment business posted a 300 basis points margin expansion too. In this context, the company’s strategy to turn around or sell loss-making businesses is commendable.

Now, Escorts is firing on all cylinders. As a result, Ebitda nearly doubled to Rs173.8 crore. And profit after tax too revved up one-and-a-half times from the year-before level.

Nevertheless, the stock did not react favourably to the excellent Q4 results. This may be because the overall revenue and profit was just in line with expectations. Besides, at Rs951, the stock already trades at a rich valuation of 23 times the estimated earnings for fiscal year 2019 and has widely outperformed the benchmark indices.

And from here on, there are some uncertainties, especially in the next 12-15 months. A lot of the revenue growth will depend on the allocation by the government for infrastructure development. Investors are unsure how order flows will pan out given that the periods immediately before and after the general election normally see a dip in government activity. This might impact businesses such as railways and construction equipment.

Moreover, one must note that Escorts is now riding on a high base that could slow down growth rates. In the final analysis, earnings growth will hinge largely on the monsoon and rural demand, given that the agri-machinery division is the key to the company’s cash flows.

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Published: 18 May 2018, 08:44 AM IST
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