Escorts Kubota’s outlook hinges on tractor demand

In the construction equipment segment, the company's management fears that potential changes to emission norms and a decrease in infrastructure spending after the Lok Sabha election could affect revenue.
In the construction equipment segment, the company's management fears that potential changes to emission norms and a decrease in infrastructure spending after the Lok Sabha election could affect revenue.

Summary

  • The company expects volume in the domestic tractor industry to fall by 6-7% in FY24. Export markets also remain dull thanks to recessionary concerns in Europe, and the company’s launch in the US has been delayed to FY26.

Escorts Kubota Ltd’s results for the three months to December (Q3FY24) caused broking firms to cut earnings estimates. Earnings were slightly below expectations, and the company’s outlook was nothing to write home about.

Escorts Kubota expects volume in the domestic tractor industry to decline by 6-7% in FY24. Export markets also remain dull thanks to recessionary concerns in Europe, and the company’s launch in the US has been delayed to FY26.

“Considering near-term weakness in tractor volumes and a protracted recovery, we are trimming FY24-26E earnings per share by 1-4%," analysts at Nuvama Institutional Equities wrote in a report on 8 February. The agri machinery products segment, which includes tractors, contributed nearly 71% of Escorts Kubota’s revenue in the nine months to December.

In Q3, this segment’s revenue fell by 3% year-on-year to 1,658 crore, led by an over 7% drop in tractor volume. The railway equipment segment clocked an 18% fall in revenue while the construction equipment segment saw 49% revenue growth. Overall, Escorts Kubota’s revenue grew by 2.5% year-on-year in Q3 to 2,291.4 crore. However, Ebitda margin rose by 507 basis points to 13.5% thanks to a low base and positive operating leverage.

Analysts at Kotak Institutional Equities expect the company to sustain margin performance across segments, given benign commodity prices and improvements in pricing. “However, we do not expect Escorts Kubota’s market share in the tractor segment to improve, as competitive intensity remains elevated," Kotak’s analysts wrote in a report on 8 February.

In the construction equipment segment, the company's management fears that potential changes to emission norms and a decrease in infrastructure spending after the Lok Sabha election could affect revenue. Shareholders and aspiring investors should therefore closely monitor the 2024 election and subsequent policy changes. Adopting a cautious approach and awaiting Q4 results might be a judicious move. Ultimately, it depends on how well Escorts can optimise its operating leverage and how efficiently its association with Kubota improves its distribution and reach.

The merger with Kubota is expected to be completed by Q4FY24. Shares of Escorts Kubota have risen by nearly 36% over the past year, but are down about 6% so far in 2024. Demand in the tractor segment will determine whether the rally continues.

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