Automobiles May 29, 2014

Escorts
Bloomberg: ESC IN
Reuters: ESCO.BO

BUY


Institutional Equities
India Research

RESULT REVIEW






Recommendation
CMP: Rs127
Target Price: Rs165
Previous Target Price: Rs165
Upside (%) 30%
Stock Information
Market Cap. (Rs bn / US$ mn) 16/271
52-week High/Low (Rs) 145/59
3m ADV (Rs mn /US$ mn) 263/4.5
Beta 1.3
Sensex/ Nifty 24,693/7,367
Share outstanding (mn) 123
Stock Performance (%)
1M 3M 12M YTD
Absolute 1.7 10.4 113.2 (6.2)
Rel. to Sensex (5.8) (7.5) 69.9 (19.6)
Performance

Source: Bloomberg
Analysts Contact
Mitul Shah
+91 22 6184 4312
mitul.shah@karvy.com

Maruti Kadam - Associate
022 - 6184 4322
maruti.kadam@karvy.com
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Sensex (LHS) Escorts
Construction Business Drags Margins; Expect
Recovery in FY15E Reiterate BUY
Escorts quarterly performance on operational front came below ours as well
as street expectations in the quarter ended Mar14. Its revenues declined 2%
YoY & 15% QoQ to Rs. 9.8 bn (vs. our estimate of Rs. 9.9 bn) despite volume
growth of 5% YoY. Decline in Spare business and Construction Equipment
business dragged overall revenue despite agri segment growing by 6% YoY.
Moreover, higher losses in the other businesses coupled with lower
profitability of Agri-Machinery segment dragged Escorts overall margins. Its
EBIDTA margins fell 77 bps YoY & 146 bps QoQ to 4.7% (vs. our estimate of
5.3%). The Companys lower interest outflow resulted in higher PBT. Escorts
adjusted PAT declined 25% YoY & 40% QoQ to Rs. 274 mn (vs. our estimate
of Rs. 308 mn. Its adjusted EPS stood at Rs. 2.3 (vs. our estimate of Rs. 2.6).
Construction Equipment Biz to Recover in FY15EMargins to Improve
from Current Level: Currently, the domestic tractor industry has been
witnessing near term slowdown, while Southern & Western regions have been
improving since past six months. Escorts market shares in these regions are
weaker traditionally, so we expect it to underperform. However, with
expectation of strong economic recovery we expect strong revival in
companys construction equipment business and losses to come down
significantly benefitting overall margins of the company.
Outlook & Valuation
Company has extended its financial year by six months and reported its FY13
financials for eighteen months. Accordingly, we change our estimates from
Sep-ending financials to March-ending for FY15 and FY16. We expect Escorts
to report an EPS of Rs. 17.1 and Rs 20.6 on revenues of Rs. 44.4 bn and Rs 50.9
bn in FY15E and FY16E respectively. We maintain our target price of Rs. 165
per share, valuing it at 8x FY16E EPS. Currently, the stock trades at P/E of
6xFY16E. In view of expected recovery in its construction equipment business
and valuation comfort, we reiterate our BUY recommendation on Escorts.
Key Financials (Standalone)
Y/E Mar (Rs. mn) Sep-11 Sep-12 Mar-14P Mar-15E Mar-16E
Net Sales 32,382 38,939 62,915 44,415 50,888
EBITDA 1,481 1,822 3,812 3,138 3,591
EBITDA margin (%) 4.6 4.7 6.1 7.1 7.1
Adj. Net Profit 1,201 692 2,416 2,039 2,458
EPS (Rs.) 11.7 5.8 20.3 17.1 20.6
ROE (%) 7.0 4.2 14.3 10.7 11.7
ROCE (%) 9.3 7.2 16.3 11.0 12.1
PER (x) 10.7 21.5 6.2 7.3 6.1
P/BV (x) 0.7 1.0 0.8 0.8 0.7
Source: Company, Karvy Institutional Research
*Note: Escorts recently changed its accounting financial year from Sept-end to March-end,
therefore, Mar-14 includes financials of eighteen months (Oct-2012 to Mar 2014) YoY
comparison for FY13 and FY15 is not meaningful.



2
May 29, 2014
Escorts

Key Takeaways of Conference Call:
Miniscule Presence in Weaker Market Impacted Volume: According to
Escorts Management, Southern & Western regions have been witnessing ~25%
growth compared to overall industry growth of ~10% and nearly flat growth
in Northern region. Escorts has a very small presence in Southern and Western
regions with market share of ~3.5-4%. This resulted in lower-than-industry
growth for Escorts, as the Company has weaker position in these markets, so it
couldnt take benefit of strong revival from South & Western regions.
Sharp Drop in Operating Performance of Other Business Draged Overall
Margins: Escorts other businesses (other than Agri machinery business)
delivered disappointed performance with Ancillary business recording 31%
YoY decline in revenues to Rs. 305 mn & Construction Equipment segment
plummeting by 34% YoY to Rs. 1,105 mn, which resulted in decline of 2% YoY
in overall revenues, compared to 6% YoY growth in agri-machinery business.
Moreover, construction business reported negative operating margins of 9% in
Mar14 as compared to -0.5% reported in year ago period. This dragged overall
margins by 77 bps YoY and 146 bps QoQ to 4.7% in the quarter.
Loss Making Segments Eat Away 20% of Agri machinery profit: Escorts
operating profit (EBIT) declined 22.6% YoY, due its Auto Ancillary &
Construction Equipment segments recording operational (EBIT) loss to the
tune of Rs. 71 mn & Rs. 99 mn, respectively during the quarter, which together
eroded 20% of the operating profit (Rs 630 mn) of agri-machinery segment in
the quarter.
Focus on Higher HP & Exports: The Company is more focused on higher HP
segment, particularly 45-50 HP & >50 HP segment. Its Management expects
improvement in its market share due to demand for higher HP tractors.
Company has added ~285 new dealers over last 12 months as a part of
strategic initiative to improve market shares. It also aims to continue focus
more on >45HP segment. Management also increased its focus on exports
market with new launches. It has guided for 100% CAGR in exports volumes
over next 2 years.
Management Lowers Guidance and Indicates Tough Market Situation:
Management has lowered its tractor industry volume growth from earlier 8-
10% to 4-5% in FY15E. Overall market condition has deteriorated over past 2-3
months post untimely monsoon and storm in few regions. Discount level has
also increased to the tune of Rs 25,000-30,000 per vehicle recently, signaling
increasing competitive pressure.
Dividend, Debt & Capex: The Companys current debt stands at ~Rs. 3.5 bn.
Its Management indicated its annual capex to the tune of Rs. 0.8-0.9 bn.
Company has declared a dividend of 18% i.e. Rs 1.80 per share for the fiscal
ended on Mar14.




3
May 29, 2014
Escorts

Exhibit 1: Escorts (Standalone) P&L Quarterly Analysis
YE Mar (Rs. mn) Mar 14 Mar 13 YoY (%) Dec 13 QoQ (%)
Total Revenue 9,829 10,006 (1.8) 11,596 (15.2)
Less:

Net Raw Material consumed 7,073 7,225 (2.1) 8,400 (15.8)
Advertisement and sales promotion Exp. 1,184 1,122 5.6 1,342 (11.8)
Personnel 1,114 1,117 (0.3) 1,144 (2.6)
Total Expenditure 9,371 9,464 (1.0) 10,886 (13.9)
EBIDTA 458 543 (15.6) 710 (35.5)
Less: Depreciation 152 131 16.4 145 4.9
EBIT 305 412 (25.8) 565 (45.9)
Less: Net Interest 135 217 (38.0) 155 (13.2)
Add: Other income 110 111 (0.3) 158 (30.4)
Profit Before Extra-ordinary items &Tax 281 305 (7.9) 568 (50.5)
Less: Total Tax 8 (62) NA 112 (92.9)
Less: Extraordinary Expense (net) (45) (7) NA 0 NA
Profit After Tax 318 375 (15.2) 456 (30.2)
Adj. PAT 274 366 (25.1) 456 (39.8)
Reported EPS (Rs.) 2.67 3.14 (15.2) 3.82 (30.2)
Adj. EPS (Rs.) 2.30 3.07 (25.1) 3.82 (39.8)
Margin Analysis (%)

Change
in bps
Change
in bps
EBIDTA Margin 4.7 5.4 (77) 6.1 (146)
Adj. NPM 2.8 3.7 (87) 3.9 (114)
Effective Tax Rate 2.8 (20.4) NA 19.8 (1,694)
Cost Analysis

RM/Net Sales 72.0 72.2 (24) 72.4 (48)
Adv.& Sales Promotion Expenses./Net Sales 12.0 11.2 84 11.6 48
Personnel/Net Sales 11.3 11.2 17 9.9 147
Source: Company, Karvy Institutional Research; NA: Not Applicable
Exhibit 2: Quarterly Segmental Revenue Break-up (%)

Source: Company, Karvy Institutional Research


Source: Company, Karvy Institutional Research


Agri
machinery
74.5
Auto
ancillary
4.4
Railway
equipment
4.5
Construction
equipment
16.5
Others
0.1
Mar' 13
Agri
machinery
81.0
Auto
ancillary
3.1
Railway
equipment
4.6
Construction
equipment
11.2
Others
0.2
Mar' 14


4
May 29, 2014
Escorts

Exhibit 3: Segmental Financials
Segment wise Revenue (Rs. Mn): Mar' 14 Mar' 13 YoY (%) Dec' 13 QoQ (%)
Agri machinery products 8,022 7,560 6.1 9,720 (17.5)
Auto ancillary products 305 443 (31.1) 294 3.8
Railway equipment 451 456 (1.0) 332 35.8
Construction equipment 1,105 1,674 (34.0) 1,309 (15.6)
Others 16 11 48.7 11 50.4
Total 9,900 10,144 (2.4) 11,666 (15.1)
Segment Result (EBIT):

Agri machinery products 630 647 (2.7) 918 (31.4)
Auto ancillary products (71) (22) 225.3 (94) (24.7)
Railway equipment 45 35 28.9 13 249.8
Construction equipment (99) (8) 1,174.6 (26) 275.3
Others (2) (3) (22.0) (2) (7.6)
Total 503 650 (22.6) 808 (37.8)
Operating Margins (%)

Change
in bps
Change
in bps
Agri machinery 7.9 8.6 (71) 9.4 (159)
Construction equipment (9.0) (0.5) (849) (2.0) (694)
Overall 5.1 6.4 (133) 6.9 (185)
Source: Company, Karvy Institutional Research; NA: Not Applicable
Exhibit 4: Quarterly Revenue Break up

Source: Company, Karvy Institutional Research; Y/E Sep.
Exhibit 5: Segmental Margin Trend

Source: Company, Karvy Institutional Research; Y/E Sep.
Exhibit 6: Adjusted Financials
(Rs. mn) Adj Mar - 13 Adj Mar - 14 Mar-15E Mar-16E
Net Sales 38,660 42,627 44,415 50,888
EBITDA 2,079 2,740 3,138 3,591
EBITDA margin (%) 5.4 6.4 7 7
Adj. Net Profit 1,025 1,755 2,039 2,458
EPS (Rs.) 8.6 15.0 17 21
YoY growth (%) - 74.1 13.7 20.6
Source: Company, Karvy Institutional Research; Adj Financials are for 12 months ending March i.e. Adj Mar13 = Apr2012 to March 2013.

20.0
23.4
15.5 16.1
12.4
16.5
9.2
12.1 11.2 11.2
74.0
68.5
76.6 75.5
81.3
74.5
83.0
79.2
83.3 81.0
0%
20%
40%
60%
80%
100%
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Construction equipment Others Railway equipment
Auto ancillary products Agri machinery products
(10.0)
(5.0)
-
5.0
10.0
15.0
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Agri machinery Construction equipment Overall
(%)


5
May 29, 2014
Escorts

Financials
Exhibit 7: Profit & Loss Statement (Standalone)
Y/E Mar (Rs. mn) Sep-11 Sep-12 Mar-14 Mar-15E Mar-16E
Net revenues 32,382 38,939 62,915 44,415 50,888
Operating expenses 30,901 37,116 59,103 41,277 47,297
EBIDTA 1,481 1,822 3,812 3,138 3,591
EBIDTA margin (%) 4.6 4.7 6.1 7.1 7.1
Other income 387 478 814 520 572
Interest 558 964 1,107 470 425
Depreciation 380 484 832 640 666
Profit Before Tax 1,006 880 2,724 2,548 3,072
Tax (195) 184 275 510 614
Reported Net Profit 1,201 696 2,449 2,039 2,458
Net Margin (%) 3.7 1.8 3.9 4.6 4.8
Adjusted Net Profit 1,201 692 2,416 2,039 2,458
Adj. Net Margin (%) 3.7 1.8 3.8 4.6 4.8
Source: Company, Karvy Institutional Research *Note: *Note: Escorts recently changed its accounting
financial year from Sept-end to March-end, therefore, Mar-14 includes financials of eighteen months
(Oct-2012 to Mar 2014) YoY comparison for FY13 and FY15 is not meaningful.
Exhibit 8: Balance Sheet (Standalone)
Y/E Mar (Rs. mn) Sep-11 Sep-12 Mar-14E Mar-15E Mar-16E
Equity capital 1,023 1,193 1,193 1,193 1,193
Reserves & surplus 16,962 14,947 17,246 19,077 21,285
Shareholders funds 17,985 16,140 18,439 20,270 22,478
Total Loans 2,858 4,599 3,499 2,499 1,799
Deferred tax liability -164 28 -74 -74 -74
Total Liabilities and Equity 20,679 20,767 21,865 22,695 24,204
Gross block 21,411 22,963 24,178 25,448 26,768
Depreciation 6,792 7,100 7,932 8,572 9,238
Net block 14,619 15,863 16,245 16,875 17,529
Capital WIP 453 665 550 480 360
Investments 3,658 3,859 3,821 3,821 3,821
Inventory 3,274 4,966 5,505 5,654 6,479
Debtors 3,405 4,454 3,447 4,381 5,019
Cash & Bank Bal 2,034 1,306 1,628 2,371 2,911
Loans & Advances 3,765 3,075 3,514 3,218 3,842
Current Assets 12,478 13,801 14,095 15,624 18,251
Sundry Creditors 7,020 8,846 8,582 9,612 11,014
Other Current Liability 1,097 1,987 1,987 1,987 1,987
Current Liability& Provisions 10,528 13,420 12,847 14,105 15,757
Net current assets 1,950 381 1,249 1,519 2,493
Total Assets 20,679 20,767 21,865 22,695 24,204
Source: Company, Karvy Institutional Research *Note: *Note: Escorts recently changed its
accounting financial year from Sept-end to March-end, therefore, Mar - 14 includes financials of
eighteen months (Oct-2012 to Mar 2014) YoY comparison for FY13 and FY15 is not meaningful..



6
May 29, 2014
Escorts

Exhibit 9: Cash Flow Statement (Standalone)
(Rs. mn) Sep-11 Sep-12 Mar-14E Mar-15E Mar-16E
EBIT 1,101 1,338 2,980 2,498 2,925
Other Income 387 478 814 520 572
Depreciation & Amortisation 380 484 832 640 666
Interest paid(-) (558) (964) (1,107) (470) (425)
Tax paid(-) 195 (184) (275) (510) (614)
Extra Ord Income 76 28 36 0 0
Operating Cash Flow 1,581 1,180 3,281 2,679 3,124
Change in Working Capital 285 841 (546) 472 (434)
Cash flow from Operations 1,865 2,021 2,736 3,151 2,689
Capex (740) (1,940) (1,100) (1,200) (1,200)
Strategic Investment 0 (155) 38 0 0
Non Strategic Investment (0) (46) 0 0 0
Cash flow from Investing (740) (2,141) (1,062) (1,200) (1,200)
Change in borrowing (128) 1,741 (1,100) (1,000) (700)
Others (523) (2,178) (2) 0 0
Dividends paid(-) (184) (171) (250) (208) (250)
Cashflow from Financial
Activities (835) (608) (1,351) (1,208) (950)
Change in Cash 290 (729) 322 743 540
Opening cash 1,744 2,034 1,306 1,628 2,371
Closing cash 2,034 1,306 1,628 2,371 2,911
Source: Company, Karvy Institutional Research
Exhibit 10: Key Ratios

Sep-11 Sep-12 Mar-14E Mar-15E Mar-16E
Revenue Growth 17.5 20.2 61.6 -29.4 14.6
EBITDA Margin 4.6 4.7 6.1 7.1 7.1
Net Profit Margin 3.7 1.8 3.8 4.6 4.8
ROCE (%) 9.3 7.2 16.3 11.0 12.1
ROE (%) 7.0 4.2 14.3 10.7 11.7
Source: Company, Karvy Institutional Research
Exhibit 11: Valuation Parameters
(Rs. mn) Sep-11 Sep-12 Mar-14E Mar-15E Mar-16E
EPS( Rs) 11.7 5.8 20.3 17.1 20.6
P/E (x) 10.7 21.5 6.2 7.3 6.1
P/ BV (x) 0.7 1.0 0.8 0.8 0.7
EV/ EBITDA (x) 9.2 10.0 4.4 4.8 3.8
Fixed Assets Turnover Ratio (x) 2.1 2.4 3.8 2.6 2.9
Debt / Equity (x) 0.2 0.3 0.2 0.1 0.1
EV/ Sales (x) 0.4 0.5 0.3 0.3 0.3
Source: Company, Karvy Institutional Research *Note: *Note: Escorts recently changed its
accounting financial year from Sept-end to March-end, therefore, Mar-14 includes financials of
eighteen months (Oct-2012 to Mar 2014) YoY comparison for FY13 and FY15 is not meaningful..




Institutional Equities Team
Rahul Sharma
Head Institutional Equities /
Research / Pharma
+91-22 61844310 rahul.sharma@karvy.com
Gurdarshan Singh Kharbanda Head - Sales-Trading +91-22 61844368/69 gurdarshansingh.k@karvy.com

INSTITUTIONAL RESEARCH
Analysts Industry / Sector Desk Phone Email ID
Hatim Broachwala, CFA Banking +91-22 61844329 hatim.broachwala@karvy.com
Maruti Kadam Research Associate +91-22 61844322 maruti.kadam@karvy.com
Mitul Shah Automobiles/Auto Ancillary +91-22 61844312 mitul.shah@karvy.com
Parikshit Kandpal Infra / Real Estate / Strategy/Consumer +91-22 61844311 parikshit.kandpal@karvy.com
Rahul Singh Textile/MidCap +91-40-44857911 rahulsingh@karvy.com
Rajesh Kumar Ravi Cement/ Logistics/ Paints +91-22 61844313 rajesh.ravi@karvy.com
Rupesh Sankhe Power/Capital Goods +91-22 61844315 rupesh.sankhe@karvy.com
Varun Chakri Textile +91 22 61844326 varun.chakri@karvy.com
Vinesh Vala Research Associate +91 22 61844325 vinesh.vala@karvy.com
INSTITUTIONAL SALES
Celine Dsouza
Sales
+91 22 61844341 celine.dsouza@karvy.com
Edelbert Dcosta
Sales
+91 22 61844344 edelbert.dcosta@karvy.com
INSTITUTIONAL SALES TRADING & DEALING
Bhavesh Gandhi Institutional Sales/Trading/ Dealing +91-22 61844361 bhavesh.gandhi@karvy.com
Prashant Oza Institutional Sales/Trading/ Dealing +91-22 61844370 /71 prashant.oza@karvy.com
Pratik Sanghvi Institutional Dealing +91-22 61844366 /67 pratik.sanghvi@karvy.com






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Disclosures Appendix

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contained in this research report.
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Stock Ratings Absolute Returns
Buy : > 15%
Hold : 5 - 15%
Sell : < 5%