Escorts: Concerns over farm sector prospects mask strong performance1 min read . Updated: 28 Jan 2019, 11:27 PM IST
- Ebitda for the quarter was 38% higher than a year ago. Net profit, too, rose by 52% to ₹140.1 crore, beating estimates
- A recent report by Jefferies India Pvt. Ltd had said that the current tractor upcycle started in 1QFY17 and completed its tenth quarter in the Sep quarter
Escorts Ltd staged a robust performance in the December quarter, beating analysts’ revenue and profit forecasts. However, the slight dip in profitability at its core agri-machinery segment and concerns over growth prospects had investors worried. The stock fell 4%, closing at ₹674 on Monday.
The stellar 36% year-on-year growth in agri-machinery and a similarly robust 30%-plus growth in the construction and railway segments are no small feat. However, there are reasons to believe that the tractor cycle, in particular, may peak soon.
A recent report by Jefferies India Pvt. Ltd had said that the current tractor upcycle started in 1QFY17 and completed its tenth quarter in the September quarter, versus an average of 11 quarters and maximum of 17, making the cycle look most “peakish" across all (auto industry) segments. Further, after two consecutive years of good monsoon, there are fears that calendar year 2019 may be not be as good.
“The long term growth fundamentals of industry are strong with lowering of the replacement cycle, but the pace of the central & state governments’ policy roll out would govern the short term industry performance," said a release by Escorts, striking a cautious note.
However, the segment’s Ebit (earnings before interest and tax) margins measured up to estimates on the Street. “Operating leverage on account of robust sales volume offset the rise in commodity costs," said Bharat Gianani, an analyst at Sharekhan Ltd.
That apart, the attempt by Escorts to diversify into new businesses to offset the risks of cyclicality in agri-equipment has yielded good returns. Both the railway and construction equipment segment margins expanded by 690 basis points and 127 basis points, respectively, during the quarter, on the back of strong sales.
Ebitda (Ebit plus depreciation and amortization) for the quarter was 38% higher than a year ago. Net profit, too, rose by 52% to ₹140.1 crore, which beat the average estimate of 11 brokers on Bloomberg.
However, the Escorts stock has already rallied on the back of strong sales numbers released earlier in the month. It was the only auto stock that stood strong despite negative sentiment on the Street, as demand weakness hurt retail auto sales. At its current price of ₹674, the stock trades at about 12 times estimated earnings for FY20, which is reasonable, though the high base for the March quarter could see growth rates moderate.