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The company’s profit before tax and exceptional items in FY11 fell 32% year-on-year (y-o-y) to 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 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.

“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 8 crore because the company had an exceptional item worth 9.9 crore.

In the last one year, the Escorts stock has underperformed the BSE-500 index. Currently, at 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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