“BUY” this mid-cap auto share with a target price of Rs. 2000: HDFC Titles
Escorts Ltd T2FY22 results
According to the brokerage, “Escorts reported a limited number of numbers in the second quarter of FY22 as erratic and uneven rainfall impacted demand for tractors. Operating income stood at Rs 1,662cr, marginally growing. Agri Machinery’s revenue declined 6% yoy to Rs 1,241 due to a 14% yoy drop. Decrease in tractor volumes partially offset by better achievement of 9% to Rs 5.9 lakh / unit. Construction Equipment division (ECE) revenue jumped 58% year-on-year to Rs 249cr, as sales volume increased 31% to 1,074 units. Railway Equipment Division (RED) recorded a topline of Rs 170cr against Rs 160cr at T2FY21. “
The brokerage firm in its research report claimed that “the company’s EBITDA fell 30% year-on-year to Rs 210cr while the EBITDA margin contracted 570 basis points to 12.6 % due to the negative impact of rising commodity prices, negative operating leverage and low volumes. The company reported a PAT of Rs 177cr, down 23% year-on-year. In October, its export business saw robust sales growth of 58% year-on-year to 765 units from 484 in October 21. However, in the domestic market, there was a decline of 3%. sales volume for the domestic activity for the month of October stood at 12,749 against 13,180 in October 21. Sales of Escorts Construction Equipment increased by 15.8% in October 21. It sold 462 machines, against 399 machines sold in Oct / 20. “
Key triggers for future performance according to HDFC Securities
The brokerage reported that “The Board of Escorts has approved a preferential allotment of 93.6 lakh shares to the Japanese company Kubota Corporation at Rs 2000 / share for a total consideration of Rs 1873cr. This would trigger an open offer from Kubota for a 26% stake in Escorts. Assuming the open offer is successful and all treasury shares (held in Escorts Benefit & Welfare Trust) are canceled, Kubota would hold a 53.5% stake in the company , which could rise further as it plans to merge its two joint ventures in India with Escorts.The Board also proposed to increase the limit for the maximum number of directors of the Company from 15 to 18, as it plans to have four directors appointed by Kubota (compared to two currently), four appointed by promoters and eight independent directors.
HDFC Securities also commented in its research report that “Investors looking for short-term gain can buy the stock at the current price of ~ Rs 1,820. The acceptance rate of shares in the open offer may be between 60 and 100% of the theoretical value. According to the shareholding model of September-2021, the FII hold a 21.5% stake in the company, DII holds 7.6%, the HNI (up to Rs 2 lakh face value) hold 7.2% and other retail shareholders hold 12.7% of the capital We would expect institutions to offer 40-50% of their stakes and the overall acceptance rate to be between 75-85%. Existing promoter i.e. Nanda family does not sell any shares and continues to remain fully open offer is complete in 3 months and there is full acceptance of shares, investor can earn annualized return by about 40%. “
“We continue to remain bullish on the company’s mid-term outlook and even if the price drops after the open offer, investors don’t need to panic and can continue to hold onto the stock given MNC’s pedigree. Kubota’s Plan to Acquire Majority Stake in Escorts strengthens commitment to this partnership Kubota is likely to leverage India’s low-cost base in sourcing products such as farm implements, equipment of construction and components that could generate strong growth for Escorts in the medium to long term, ”said HDFC Securities.
Buy Escorts Ltd with a target price of Rs. 2000
According to the brokerage firm’s appeal, “The company continues to be net debt free with sufficient cash available for growth. In addition, Kubota’s induction as the majority promoter and prospects for recovery in the rail / construction space are encouraging.We expect Escorts / EBITDA / PAT revenues to grow to 9/6/6% CAGR in FY21-FY24, driven by improved domestic volumes and increased At the current price, the stock is trading at 18.6x the estimate of September 23 EPS, which is not expensive given its strong support to the post-Kubota futures outlook becoming the majority shareholder . “
“We believe investors can buy the stock in the Rs 1800-1830 band and add declines to the Rs 1650-1680 band (17x Sep-23E EPS) for a basic fair value of Rs 2000 (20.5x Sep-23E EPS) over the next 2 quarters. Investors can offer their shares in the open offer scheduled for the next few months at Rs 2000. After the offer closes, we expect the price of the share reacts to the fall, but in the medium term, the price of the open offer may be exceeded ”the brokerage claimed.
The stock was featured in HDFC Securities Limited’s brokerage report. Investing in stocks presents a risk of financial loss. Investors should therefore exercise caution. Greynium Information Technologies, the author and the brokerage are not responsible for any losses caused as a result of decisions based on the article.