Rakesh Jhunjhunwala booked profit in this stock. Can the counter still deliver?

Ace investor Rakesh Jhunjhunwala recently tendered 3.57 per cent stake or 47,19,362 shares of the company in a recent open offer by the new co-promoter Kubota. The ace investor held a 5.68 per cent stake in the company as of February 18.

The tractor maker’s March quarter results were also forgettable, with profit falling 28 per cent on a 32.8 per cent slide in volumes.

Analysts said the volatility in tractor demand, raw material headwinds and lower margin expectations and a high base of the last year are weighing on the stock’s valuations, as the scrip has rallied over 300 per cent from August 2019 lows until the recent fall.

Of the total 22 analysts’ recommendations, nine were ‘hold’ calls and similar ‘buy’ calls on the stock, with the average target price of Rs 1,853.75, suggesting a potential 13 per cent upside.

The company, earlier this month, reported a 28.42 per cent decline in consolidated net profit to Rs 189.98 crore from Rs 265.41 crore in the year-ago quarter.

Tractors sales account for about 77 per cent of the company’s revenues, followed by construction equipment (14 per cent) and railways (9 per cent).

Escorts said its consolidated revenue for the quarter fell to Rs 1,878.51 crore from Rs 2,228.75 crore YoY. Ebitda margin stood at 13.1 per cent, a contraction of 44 basis points sequentially on account of the adverse impact of higher commodity prices and negative operating leverage.

“Escorts’ stock price has grown at 19 per cent CAGR over the last five years from Rs 650 in May 2017, vastly outperforming the Nifty Auto Index. We retain hold rating on Escorts amid muted tractor growth prospects over FY22-24 and await contours of medium-term business growth plan constructed by Escort and the new co-promoter Kubota,” ICICIdirect said in a recent report while suggesting a target of Rs 1,840 on the stock.

Securities expects Escorts tractor volume to grow by a mere 2 per cent in FY23. This brokerage is expecting a flattish domestic volume YoY and a 30 per cent growth in exports.

Despite subdued volume in FY23, regular price hikes coupled with product mix and better construction equipment/railway segment would benefit the company on the revenue front, it said while raising its revenue, Ebitda and PAT estimates by 2-6 per cent for FY23.

During the March quarter, the company’s construction equipment (ECE) division posted a 16 per cent sequential rise in topline at Rs 319 crore from Rs 276 crore in the December quarter. The railway equipment division (RED) recorded a flat topline of Rs 173 crore sequentially.

The order book for the division was over Rs 440 crore at end of March 31. It is expected to get executed in the next 6-8 months. Overall, the company is expecting a 20 per cent topline CAGR with a market share of 15 per cent over the next 2-3 years.

“We expect a healthy recovery in RED/ECE businesses coupled with modest growth in the domestic tractor business. Considering the volatility in tractor demand, RM headwinds, lower margin expectations and high base of last year, we maintain our hold rating on the stock, revising our target price to Rs 1,690 from Rs 1,900 earlier), valuing the company at 19 times FY24 P/E,” Axis Securities said in a note.

Securities said a solid balance sheet, higher return ratio and synergies emerging from the partnership with Kubota may likely act as key growth catalysts over the longer term. This brokerage maintained its Buy rating on the stock with a revised target price of Rs 1,970.

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