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Escorts: Will the slide stop?

Jan 4, 2002

The prospects of the domestic tractor majors have improved with the economy growing at a higher rate in 2QFY02 as compared to the first quarter of the current fiscal. Though there are signs of improvement in demand scenario, not all players are expected to benefit from the upturn. Escorts, the No. 3 in domestic tractor industry, is one of them.

(Rs m)2QFY012QFY02Change1HFY011HFY02Change
Sales 2,948 1,653 -43.9% 5,637 4,153 -26.3%
Other Income 13 35 174.6% 49 37 -25.1%
Expenditure 2,632 1,785 -32.2% 5,028 4,123 -18.0%
Operating Profit (EBDIT) 316 (133) 609 29 -95.2%
Operating Profit Margin (%)10.7%-8.0%10.8%0.7%
Interest 188 152 -19.5% 320 305 -4.9%
Depreciation 95 95 0.3% 185 201 9.0%
Profit before Tax 46 (345) 153 (440)
Extraordinary item - - 1,051 523 -50.3%
Tax 5 (75) 275 20 -92.7%
Profit after Tax/(Loss) 41 (270) 930 63 -93.2%
Net profit margin (%)1.4%-16.3%16.5%1.5%
No. of Shares (m) 72.2 72.2 72.2 72.2
Diluted Earnings per share* 2.3 (14.9) 25.7 1.7
P/E Ratio (x) 30.5

The company recorded a sharp fall in sales in 2QFY02 on account of labour strike in parts of the tractor manufacturing facilities in August 2001 (tractors contribute to around 85% of the company's overall sales). This along with the slowdown in the economy affected tractor demand in 1HFY02. Tractor sales in 1HFY02 have fallen by 19% to around 100,000 units. The company's market share has also come down to 15% for the period ended April-November 2001 (17% in FY01). Also the industry has also been suffering from excess inventory build-up and as a result prices have come under pressure. Competition has also intensified with the entry of two multinationals in the higher BHP segment for which demand is steadily increasing.

Though raw material costs fell in 2QFY02, a significant rise in manufacturing and other expenses pushed the company into the red. Extraordinary income in 1HFY02 includes profit from sale of 26% equity holding in Yamaha Motors Escorts Limited for a consideration of Rs 522 m. Escorts has utilised this surplus cash to repay debt and so interest costs fell by 19.5% in 2QFY02.

There seems to be no respite in the third quarter as well. For October and November 2001, the company's sales fell by 98% and 62% respectively and therefore the third quarter results are expected to be in line with 2QFY02. Though tractor demand is expected to rise in the last quarter of the current fiscal, we expect the company to post around 30% drop in tractor sales in FY02. Even after considering the extraordinary income, the company is expected to post a loss in the current year.

The stock currently trades at Rs 53 implying a P/E multiple of 30.5x annualised 1HFY02 earnings.

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