Escorts: Maintain ‘neutral’ as positives are largely priced in

Escorts (ESC)’s 3QFY21 performance was in-line, with strong profitability and over 80% PAT growth. This was led by strong tractor volumes, a favorable mix, and cost-cutting initiatives. While the demand outlook remains strong, supply chain challenges are easing. Also, other businesses are showing signs of recovery. We upgrade FY21E EPS by ~5%, factoring in volume and margin upgrades, but we maintain FY22E/FY23E EPS estimates. We maintain our Neutral rating as the positives are largely priced in.

Better mix, lower marketing and other expenses support margins. ESC’s 3QFY21 revenues/EBITDA/PAT grew 23.5%/71.5%/83.4% YoY to ~INR20.1b/ INR3.6b/INR2.8b. 9MFY21 revenues /EBITDA/PAT grew 7.7%/63% /70.2% YoY to INR47.1b/INR7.8b /INR6b. Tractor volumes increased ~26% YoY. Net realizations improved 1.8% YoY to INR523.6k (v/s est. INR543.7k) on price hike (2% in Nov’20) and a favorable mix (>40HP contribution at 60% v/s <50% in 3QFY20). Tractor revenues grew 28% YoY, Railways declined 6%, and CE grew 13%. EBITDA margins expanded ~500bp YoY (-30bp QoQ) to 18% (v/s est. 17.6%), driven by a better mix and savings in all cost heads (RM: 120bp YoY, staff: 140bp YoY, other expenses: 250bps). QoQ decline in margins reflects an adverse mix and RM cost inflation. Tractor PBIT margins improved ~560bp YoY (+10 bp QoQ) to 20.1%. Railways PBIT margins declined to 12.7% (-570bp YoY) due to higher share in a new product. CE PBIT margins were at 7.5% (+270bp YoY).

Outlook for Tractor. With a strong rabi season (good sowing and higher MSPs), the outlook for 4Q is very strong. While pent-up demand is more or less over, farm ecosystem indicators are all positive and hence growth should continue. Furthermore, the non-agri use of tractors (25–35% of sales), which is yet to revive, could support tractor demand in FY22. In 9MFY21, it had reached half the normal sales.