Escorts Ltd’s shares have come under pressure after the company reported disappointing results for the March quarter. Gloomy mid-term prospects for agri-machinery could put further pressure on the stock. On Wednesday, it ended at ₹628.65, down from about ₹820 in mid-March.
Domestic tractor sales fell 1% year-on-year in March, dragging quarterly growth down to 4.8%. The weak performance in the March quarter tracks a 25% rise in tractor sales in the first three quarters of FY19. Rural farm distress, high summer temperatures and the overhang of general elections are impacting tractor sales.
Despite weaker quarterly sales, investors were still hopeful of strong margins in the tractor segment. But, instead, the firm reported a drop in Ebit (earnings before interest and taxes) margin for the agri-machinery segment to 13.1% in the March quarter, from 15.1% a year earlier.
Ebit margin of the railways segment fell too, although that of construction equipment rose. But these two businesses together comprise only a fourth of overall revenue, and did little to shore up overall profitability.
Escorts’ operating profit margin fell to 11.6% in the March quarter from 12.1% a year earlier. The management said the drop in margins was mainly due to a change in product mix. The March quarter saw a larger offtake of lower HP (horse power) tractors, where margins are lower. Besides, analysts say other expenses were high on account of provisions made on inventory. These offset the gains from product price hikes and lower commodity prices.
For Escorts, there could be more pain in the coming quarters. The 18% year-on-year drop in tractor sales in April shows that demand continues to remain subdued. Analysts had predicted that weak demand in the October-November festive season would be compensated by higher sales in April. That has not happened. The agri-machinery industry now hopes for a good monsoon, which may lead to a partial recovery.
According to Emkay Global Financial Services Ltd, “After a strong compounded annual growth of 16% in domestic tractor volumes over FY16-19, we expect flat growth over FY19-21E, due to the high base.” Indeed, most brokerages expect the farm machinery cycle to turn down in the next few quarters. Given that this business is the core earnings segment for Escorts, the stock may continue to be under pressure.
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