Escorts Ltd’s joint venture (JV) with Japanese tractor maker Kubota Corp. for a brownfield capacity of 50,000 units seems to have pleased investors. The stock rose 3.5% on Tuesday, although it wobbled the day before due to weakness in the broader market.
The alliance comes on the back of strong double-digit industry growth in tractor sales in the last 8-10 quarters. With three-fourths of its income from farm equipment, the company clocked a 15% year-on-year growth in net revenue and 33% jump in profit after tax for the September quarter.
Higher farm mechanization, government subsidies and the increase in minimum support prices (MSPs) have improved prospects for tractor sales, a clear motivation to boost capacity through the JV. The fact that the venture aims to roll out 50,000 tractors by FY20 with an initial combined investment of just ₹ 300 crore shows the company will get more bang for its buck.
Analysts reckon that the chief focus of the JV being 30-50 horsepower tractors would help Escorts plough better in southern markets, where it is weak currently.
An added benefit for revenue would be access to global markets through the marketing channels of its Japanese partner, although this would be in the long haul.
Near-term fundamentals are unlikely to change as rural sentiment is strong on the back of higher crop output and higher MSPs. For FY19, the Escorts management reiterated its 12-15% growth guidance for tractors.
But macroeconomic factors could change growth rates over the long term. Analysts are slightly jittery about the monsoon given that there have been three good years in a row. Further, one wonders whether incentives to farmers and the rural community will continue after the forthcoming elections, which in turn would impact growth.
Meanwhile, the non-banking financial companies-led liquidity crisis may have an adverse impact on construction equipment sales, albeit a small part of Escorts’s portfolio.
So far, the company’s valuation has been on firm ground in the last two years. Yet, at ₹ 625, the Escorts share trades at about 11 times the estimated earnings for FY20, which trails market leader Mahindra and Mahindra Ltd by a significant margin.
The JV would be a shot in the arm for Escorts’s earnings growth as it would fill product gaps and help ramp-up market share, besides entering new regions.