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January 06, 2012

INITIATING COVERAGE

Escorts Ltd.
SENSEX: 15857.1 CMP: INR 66.7 Target: INR 144 Automobiles (Tractors)

Escorts is the third largest tractor company in India with c. 12% market share. Tractor business accounts for the majority of the company's revenues and profits. It is also present in construction and material handling equipment, such as cranes, compactors and forklifts with c. 54% market share in pick & carry (PNC) cranes segment. It is also engaged in railway equipment and auto components businesses with minimal contribution. Investment Rationale Tractor business to regain momentum Escorts has c.20% market share in the northern region which accounted for c. 57% of its volumes in FY11. Escorts is currently focussing to increase its share in high-growing southern region where it has only 5% market share. It is already in advanced stage to launch new tractor models especially designed for harder soils of AP & Karnataka. We expect tractor division topline (~72% revenue contribution) to register a CAGR of 14% over the next 2 years. Construction equipment division building muscles Escorts through its 100% subsidiary Escorts Construction Equipment Ltd. (ECEL) is the market leader in the PNC segment and enjoys number 2 position in slew cranes & number 3 position in Compactors in India. In order to cater to the growing market demand, Escorts is in the process of doubling its capacity by FY13E with a capex of INR 405 mn. We expect ECEL topline (~20% revenue contribution) to register a CAGR of 25% over the next 2 years. Auto suspension division to break-even by FY13E Escorts derives c.3% of its revenues from Auto suspension division (ASD). ASD derives ~60% of its revenues from exports and ~20% from replacement & OEMs respectively. At present it is catering to the likes of two-wheeler manufacturers viz. TVS Motors, M&M & Suzuki in domestic market & Yahama, Suzuki, Aprilia & Malaguti in exports market. Escorts is planning to add new products and also start catering to 4-wheelers manufacturers. We expect ASD to break-even by FY13E and register a CAGR of 44%in revenues over the next 2 years. Shareholding (%)

Promoters FIIs DIIS Others

Railway equipment division (RED) to register muted growth Escorts derives c.4-5% of its revenues from this division. The current order book stands at INR 400 mn to be executed in the next 3 to 4 months. Escorts has got approval for its new products viz. Bogie mounted & Panel mounted brake systems and zero-discharge toilet from RDSO. It is now awaiting approval from Indian railways. It has recently done technical collaboration with Dako & Ingeteam for technological enhancements. We expect RED division to register a CAGR of 3% in revenues over the next 2 years. Capex Plans Escorts has planned a total capex of INR 1400-1600 mn (ex-ECEL) to be spent over the next 2 years. A major portion of this expansion is related for investments in R&D, adding more machines, debottlenecking of existing capacity and making the existing capacity more flexible. It has already incurred INR 500 mn up till now. Outlook & Valuation We expect Escorts to regain its lost market share in tractors to ~13% from 11.7% in FY11, with its recent initiatives of launching new products specific to the needs of Southern India soil, increasing the dealer network and also with the revival in demand in northern markets where it has got strong foothold. We expect tractors to remain the dominant business for Escorts, with 68.8% revenue contribution in FY13E. We expect volumes in domestic tractor industry to register a CAGR of 13-15% over FY11-15E. We expect Escort's topline & bottomline to register a CAGR of 17% & 20% respectively over FY11-FY13E on the back of consistent growth in tractor division, volume-driven growth in ECEL, turning around of auto business and stable revenues from railways segment. We recommend a "BUY" with a target Price of INR 144 in 24 months, at 6x FY13E EV/EBITDA. (INR mn)

500495 ESCORTS ESC...
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