Stock Review: Escorts

Tractor maker Escorts reported a 27 per cent rise in standalone net revenues at `2,746 crore for 2009-10, even as operating margins contracted 80 basis points year-on-year to 8.4 per cent.

Losses in the auto ancillary segment increased, there was a marginal dip in the higher-margin railways business segment and other expenses were higher. However, net profit grew over 50 per cent year-on-year to `137.5 crore on the back of lower interest outgo after the debt restructuring last year.

Segmental performance was quite robust. The agri machinery segment posted 30 per cent year-on-year growth, as volumes rose 32 per cent to 60,000 units (including 2,000 exported units). Auto ancillary revenues increased 30 per cent, but those from the railways segment were flat compared to the year-ago period.

While earnings before interest and tax (Ebit) in the agri machinery segment grew over 50 per cent, expanding Ebit margins by 125 basis points to over nine per cent, losses in auto ancillaries increased over 40 per cent to `17 crore.

The promising construction equipment subsidiary, Escorts Construction Equipments, saw revenues increase 38 per cent to around `570 crore in 2009-10.

Escort's debt to equity ratio is now a comfortable 0.2x and operations look geared to make most of the expected strengthening in demand. The September quarter saw volumes dipping on seasonal trends, but that is expected to change going ahead. Raw material costs, as a ratio to net revenues, have come down on a sequential basis, partially due to a six per cent rise in realisations over the previous quarter. Staff costs have also dipped, as operating leverage stays in play. However, the quarter saw higher other expenses, like an uptick in royalty and commission costs, pulling down Ebitda (earnings before interest, tax, depreciation and amortisation) margins by nearly 450 basis points.

At CMP, the stock trades at a significant discount to peers at a valuation of about 12 times 2010-11 earnings per share estimates.

Coming out of the balance sheet deleveraging exercise last year, the company is set to benefit from the likely rise in tractor demand