Escorts ploughs healthy Q4 profit as tractor  sales  ease  pain  in  other segments

Amid the gloom of virus-led disruptions, Escorts Ltd’s March quarter (Q4FY20) results brought some cheer for investors. The stock rose 3.6% on Friday as the company’s agri-machinery segment lifted overall profitability.

For the quarter, earnings before interest, tax, depreciation and amortization (Ebitda) margin zoomed by 250 basis points (bps) year-on-year (y-o-y) to 14.1%. It also beat Bloomberg’s consensus estimate of 10.5% by a wide margin.

One basis point is one hundredth of a percentage point.

Undoubtedly, a good rabi crop and harvest supported the quarter’s performance. Indeed, production halt and reduced dealerships due to the lockdown led to a 20% y-o-y drop in agri-machinery sales. However, realizations remained strong, rising 7.5% due to underlying demand. As a result, the segment posted a 29.5% y-o-y growth in profit margins.

But then, the virus and lockdown took a toll on construction equipment segment. Weak operating leverage on the back of a steep drop in sales led to profit margins falling to 4.3% from 7.1% in the year-ago period. Further, margins fell in the railway equipment segment, although it is small in terms of revenue and profits contribution to Escorts, also inched lower.

To be sure, the pain from these two segments were offset by agri-machinery, which accounts for about three-fourths of the total revenue. According to Antique Stock Broking Ltd, higher production and the operating leverage that offset fixed costs, lower commodity prices and better product mix helped operating performance. Escorts’ Ebitda for the quarter was 32% higher than Bloomberg’s estimates and 3% higher y-o-y at ₹194 crore.

However, the complete lockdown from April and its impact on supply chain and demand will hurt June quarter performance. But, analysts and industry reckon that the tractor and farm equipment sales dip will be least in FY21 among all automotive segments in India. That said, competition is rising in tractors. Although Escorts will soon start production under its joint venture with Japan’s Kubota Corporation, analysts pointed out that it lost about 193 bps market share y-o-y during the quarter.

Also, the construction equipment segment’s recovery is uncertain due to the extended lockdowns in India. Be that as it may, the robust outlook for farm equipment sales over the next several quarters would support earnings expansion and the stock price. Escorts’ shares have risen 19% since mid-April, when restrictions were eased for some essential services and sectors, including farm equipment. At ₹817 apiece, the stock trades at about 13 times the estimated FY22 earnings per share, which prices in positives.