THE BEST STOCK
TO ADD TO
YOUR PORTFOLIO
THIS MONTH
IS HERE!
NOVEMBER 2020
ESCORTS LIMITED We analyze 4000 stocks; we choose
around 50 and out of that we give
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9 November 2020
-WWW.MARKETSMOJO.COM
By research team
([email protected])
STOCK OF THE MONTH
Escorts Limited
CMP Rs. 1,355.80 WHO SHOULD BUY
Price as of 9 Nov 2020
Risk Appetite High Risk
Decision BUY Expectations High Return
<30% (Auto -
Portfolio Sector Exposure
SUMMARY Tractor)
• The company came out with the best quarterly financial If sector exposure > 30%, use Portfolio Optimizer
number in September with a net profit of Rs 230 crore-up tool
by 120 percent over the same period last year
STOCK INFO
• Demand for the tractor is buoyant that augurs well for the
company's future growth BSE 500495
• The company is focusing on cost efficiency that is helping NSE ESCORTS
the company to expand its margin. For the first half of the Mid Cap (Rs. 18,280
Market Cap
current financial year operating profit margin stands at 15.5 Cr.)
percent as compared to 9.8 percent for the same period of Sector Auto - Tractor
last year
52 w L/H (Rs.) 527.10/1,364.80
• The company will be focusing on distribution to expand its
Average Vol (6M) 26.60 Lacs
reach to improve its market share
Equity Capital (Rs.) 134.8 Cr
• Due to Covid construction equipment division of the
Book Value per share
company did not do well, but management believes that 281.83
worst is over and hence next half should be better than the (Rs.)
first half
STOCK PERFORMANCE
• The company cash flow from operation for September Price as of 09 Nov 2020
2020 was a healthy level of Rs 778 crore as compared to
Rs 295 crore in September 2019 Period 1M YTD 1Y 3Y
• The company is debt-free and has healthy cash and bank
Escorts Ltd. (%) 11.0 115.8 107.4 90.3
balance of Rs 2,500 crore Sector Index (%) 10.1 98.2 84.8 30.46
• The company enjoys higher patronage from institutional Sensex (%) 5.2 3.2 5.64 28.11
investors. FPIs and domestic institutional investors hold a
30.1 percent stake in the company
KEY RATIOS
• The famous investor-Rakesh Jhunjhunwala- hold a 5.64
percent stake in the company PE ratio 28.79
PB ratio 3.89
• Kubota- a Japanese company- global agriculture and water- Dividend Yield 0.19%
related industry leader took a 9.09 percent stake in Escorts
a few months back by investing Rs 1,042 crore. ROE (TTM) 13.50%
ROCE (TTM) 40.08%
• Escorts and Kubota also have JV to manufacture higher-
D/E 0.00
end tractors where Escorts hold a 40 percent stake in the
JV. The JV started trial production by September 2020 EPS 44.65
EPS (diluted) 44.65
• Our Technical indicators are suggesting bullish trend
9 November 2020
-WWW.MARKETSMOJO.COM
By research team
([email protected]) 1
Stock of the Month: Escorts Limited
INVESTMENT ARGUMENT
Few factors make us believe that Escorts is a good growth story to bet on. The company is a leading manufacturer of tractors
with a market share of about 10 percent. The tractor industry reports good growth due to better rabi crops, well spread
Southwest monsoon, faster procurement of grains by the Indian government from farmers, and excellent financial infrastructure
in rural India. That makes us believe that the tractor industry should do well, and so Escorts.
In the last few years, Escorts worked on its cost structure, sold businesses that are not its core business, and reduced its
borrowing amount to make it lean and fit. Due to this, the ROCE of the company in single digits a few years back is now healthy
at double digits. For FY 20, it was at 20 percent and in the first six months of the current year at 21.9 percent.
For the September quarter, the company reported smart improvement in its financials (the first quarter had an impact due to
lockdown), helping the company report the best quarter. Instead of looking at data quarterly, we have looked at data for the first
half to make better sense of growth. The company sold 42,951 tractors in the first half of the current year- a growth of 4.4
percent. Despite revenue remained at the same level company's margin expanded significantly. The company's margin improved
due to four factors- operating leveraging, favorable product mix (the company sold more of higher HP tractors where margins
are better), cost rationalization, and softer commodity prices. The consolidated operating profit increased to Rs 420 crore
compared to the same first half of Rs 267 crore-growth of 57 percent. Over the last few years, the company has been expanding
its margin at a steady pace. With better margins, the company's net profit increased to Rs 320 crore compared to the same
period last year of Rs 189 crore- a growth of 69 percent. In FY 20, the company's net profit was Rs 472 crore.
It's expected that the tractor industry will grow in the current financial year by low double-digit. In the FY20 industry, experienced
degrowth. In the first seven months (that is till October), Escorts sold 56,255 tractors-a growth of 3.9 percent. The company
faces a problem in meeting the demand as it faces supply chain issues that impact its ability to meet growing demand. For
FY20, Escorts sold 86,018 tractors. We are not expecting significant growth in sales numbers for FY21 as the company operates
at peak capacity. Hence, volume growth for full-year is estimated in the region of about 4 percent for the company. But better
margins will help the company to report bottom-line growth.
Escorts has two more divisions-construction equipment and railway equipment. But it's tractor division that drives significantly
its top line as well as the bottom line. Tractor division accounted for 77 percent and 83 percent of the EBIT last year. On the
other hand, construction equipment business accounted for 14 percent of the turnover but accounted for a mere 4 percent of
EBIT and Railway equipment business accounted for 8 percent of turnover and EBIT.
The company's construction equipment business struggles with poor sales numbers as the industry is facing cash flow issues.
On railways equipment business too, topline and EBIT are lower in the first half than the same period last year. The government
capex on railways has slowed down, and that's not only impacting order book inflow but also execution speed. The company
has Rs 350 crore order book in the railway equipment division that the company is expected to complete in the next 6-8 months.
But management has guided that both divisions will maintain margins the same as last year.
Tractor division will have margin pressure in the second half due to commodity price inflation (as steel prices have started
moving up). The second product mix will not be favorable as the company is expected to sell less than 40 HP tractors.
Escorts is a debt-free with good cash flow from operation. For the half-year ended September 2020, cash from operation stood
at Rs 778 crore compared to September 2019 of Rs. 295 crores. The company has cash and cash equivalents of Rs 2,500 crore.
In the last few years, Institutional investors have a steady stake in the company with 30 percent as of September and the famous
investor-Rakesh Jhunjhunwala- holds a 5.64 percent stake. He is paring stake in the company steadily in the last few quarters.
Its JV partner Kubota acquired a 9.09 percent stake in this financial year by investing Rs 1,042 crore. Escorts has JV with Kubota
to do contract manufacturing with advanced technology tractor to produce 50,000 tractors. The trial production has started
recently, and management hopes that production will stabilize by the end of FY21. Escorts can meet higher demand from
tractors through this JV not only for the domestic market but also for the international market. It's also expanding its tractor
capacity from present 10,000 per month tractor to 12,500 tractors per month.
In our internal parameters, Escorts is doing well. The quality of the company is good, and the valuation is at an expensive level.
The recent financial trend is very positive, and technically the company's share price is in the bullish zone, indicating further
upside.
The score of the company is at 78. It is an excellent company to have in the portfolio.
9 November 2020
-WWW.MARKETSMOJO.COM
By research team
([email protected]) 2
Stock of the Month: Escorts Limited
Exhibit 1 Exhibit 2
Escorts vs Benchmark (Returns) Escorts Price Movement
Escorts Returns (%) Sensex Returns (%) 1400
1200
100%
80% 1000
60% 800
40%
20% 600
0% 400
-20%
200
-40%
-60% 0
Aug 2018
Aug 2019
Aug 2020
Feb 2018
Feb 2019
Feb 2020
Nov 2017
Nov 2018
May 2018
May 2019
Nov 2019
May 2020
Aug 2018
Aug 2019
Aug 2020
Feb 2018
Feb 2019
Feb 2020
Nov 2017
Nov 2018
Nov 2019
May 2019
May 2018
May 2020
Exhibit 3 Exhibit 4
Sales Growth Gross Profit Margin
Net Sales (Rs Cr.) QoQ Growth%
60%
2,000 60%
50%
52% 50%
40% 40% 37%
1,500 32%
24% 20% 30% 25% 23%
1,000
20%
0%
-7% 10%
500 -16%
-21% -20%
0%
0 -40% Sep-19 Dec-19 Mar-20 Jun-20 Sep-20
Sep-19 Dec-19 Mar-20 Jun-20 Sep-20
Exhibit 5 Exhibit 6
EBITDA Growth EBITDA Margin
EBITDA (Rs Cr.) QoQ Growth% 20% 18%
18%
350 200% 16%
144%
300 14% 13% 13%
150% 11%
250 12%
9%
200 100% 10%
71% 8%
150 50% 6%
100 -15%
4%
0%
50 -12% 2%
-33%
0 -50% 0%
Sep-19 Dec-19 Mar-20 Jun-20 Sep-20 Sep-19 Dec-19 Mar-20 Jun-20 Sep-20
9 November 2020
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By research team
([email protected]) 3
Stock of the Month: Escorts Limited
Exhibit 7 Exhibit 8
PAT Growth PAT Margin
PAT (Rs Cr.) QoQ Growth% 16%
250 180%
14%
143% 14%
150% 12%
200
120%
10%
9% 9%
9%
150 90% 8%
50% 8%
17% 60%
6%
100 30%
-16% 4%
0%
50 -27% 2%
-30%
0%
0 -60%
Sep-19 Dec-19 Mar-20 Jun-20 Sep-20
Sep-19 Dec-19 Mar-20 Jun-20 Sep-20
Exhibit 9
Variance Analysis
Sep-20 Jun-20 Mar-20 Dec-19 Sep-19 Comments
Total Operating income 1,654.18 1,089.26 1,385.65 1,650.22 1,333.77 Grown YoY by 24%
Total Expenditure (Excl. Grown QoQ as well as
Depreciation) 1,356.11 967.28 1,203.58 1,437.18 1,208.88 YoY
Operating Profit (PBDIT)
excl Other Income 298.07 121.98 182.07 213.04 124.89 Grown by 139% YoY
Other Income 39.19 30.59 30.30 27.93 21.44
Operating Profit Grown 130% YoY and
(PBDIT) 337.26 152.57 212.37 240.97 146.33 121% QoQ
Interest 3.77 2.41 3.35 3.59 4.05
Depreciation 28.00 27.08 28.38 27.35 26.74
Grown by 148% QoQ
Profit Before Tax 305.49 123.08 180.64 210.03 106.32 and 187% YoY
Tax 77.26 29.05 51.42 56.33 4.08
Profit After Tax 228.23 94.03 129.22 153.70 102.24 Grown by 143% QoQ
Exhibit 10
Margins
Sep-20 Jun-20 Mar-20 Dec-19 Sep-19 Avg. (4 Qtrs.) Comments
GPM 32.30% 50.13% 22.91% 36.72% 24.90% 33.66% Low than Average (4 Qtrs) -
Higher than Average (4 Qtrs) -
OPM 18.02% 11.20% 13.14% 12.91% 9.36% 11.30% Promising
Higher than Average (4 Qtrs) -
NPM 13.74% 8.50% 9.22% 9.38% 7.61% 8.16% Promising
9 November 2020
-WWW.MARKETSMOJO.COM
By research team
([email protected]) 4
Stock of the Month: Escorts Limited
Exhibit 11
Revenue by Industry Practice – First Half of FY 2021
Unallocated
Railway Equipments 0%
8%
Construction
Equipments
8% Agri Machinery Products constitute 84%
of the entire composition
Agri Machinery
Products
84%
Exhibit 12
Shareholding Snapshot
Insurance
Companies,
0.23% Promoters,
36.59%
Non-Institutions,
33.29%
FII’s have increased their stake in the
company by 3% for the quarter ended in
September 2020
Other DII's, 0.01%
Mutual Funds,
8.29% FIIs, 21.59%
COMPANY BACKGROUND
Escorts is one of the leading players in the tractor industry and also has presence in Material
Handling, Construction Equipment and Railway Equipment.
The Group has earned the trust of over 5 million customers by way of product and process
innovations over seven decades.
Escorts endeavors to transform lives in rural and urban India by leading the revolution in agricultural
mechanization, modernization of railway technology and transformation of Indian construction.
9 November 2020
-WWW.MARKETSMOJO.COM
By research team
([email protected]) 5
Stock of the Month: Escorts Limited
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9 November 2020
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By research team
([email protected]) 6
Stock of the Month: Escorts Limited
9 November 2020
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By research team
([email protected]) 7
Stock of the Month: Escorts Limited
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