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Escorts: What lies ahead? - Views on News from Equitymaster
 
 
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  • Jul 15, 2002

    Escorts: What lies ahead?

    Escorts Limited that has presence in agriculture machinery and engineering products, continues to suffer from the downturn in the tractor industry. The company recently announced its FY02 and 1QFY03 results. The sharp fall in sales in the first quarter of the current year ended June 2002 is primarily on account of de-stocking exercise undertaken by the company.

    (Rs m) FY01 FY02 Change 1QFY02 1QFY03 Change
    Net sales 12,932 11,079 -14.3% 2,500 1,673 -33.1%
    Other Income 106 171 62.4% 525 15 -97.1%
    Expenditure 11,749 10,419 -11.3% 2,305 1,820 -21.0%
    Operating Profit (EBDIT) 1,183 661 -44.1% 195 (147) -
    Operating Profit Margin (%) 9.1% 6.0%   7.8% -8.8%  
    Interest 612 662 8.3% 153 185 20.7%
    Depreciation 388 414 6.8% 106 105 -1.2%
    Profit before Tax 288 (245) - 460 (422) -
    Extraordinary items 926 295 -68.2% (33) (35)  
    Tax 140 (31) - 95 (160) -
    Profit after Tax/(Loss) 1,074 81 -92.4% 332 (297) -
    Net profit margin (%) 8.3% 0.7%   13.3% -17.7%  
    No. of Shares (m) 72.2 72.2   72.2 72.2  
    Diluted Earnings per share* 14.9 1.1   18.4 (16.4)  
    (* annualised)            

    One of the key reasons for the dismal performance of the company in FY02 was on account of a strike in one of its tractor manufacturing facility that disrupted production for atleast two months. The result is evident from the monthly tractor sales of Escorts in the graph below. As against an average monthly volume of around 3,700 units, Escorts was able to sell just around 3,100 units per month in FY02. But the company managed to push volumes from December 2001 as a result of which its market share increased by 30 basis points to 19.2% in FY02. Tractor sales, in unit terms, were down 15.3% to 38,034 units in FY02 as against the industry decline of around 15.6%.

    The aggressive volume push strategy of Escorts in 4QFY02 however, seems to have worked against the company. Since the industry is already suffering from over-capacity and higher dealer inventory, the company was forced to undertake a de-stocking exercise. Consequently, there was a sharp fall in sales in the first quarter of the current fiscal.

    Operating margins in FY02 also witnessed a sharp decline on account of strike and general weakness in price realisations in the tractor industry. One of the important aspect of its performance in FY02 as well as 1QFY03 is the acceleration in its strategy to exit from non-core businesses. In FY02 it sold its remaining 26% stake in Escorts-Yamaha for a consideration of Rs 522 m. The trend continued in 1QFY03 as well. It has entered into an agreement to sell its entire 60% stake in Escorts Class for a consideration of around Rs 630 m. However, it has not been accounted in 1QFY03 on account of pending approval from various authorities. But if one were to include the proceed from stake sale, net profit in 1QFY03 actually stands at Rs 334 m, a marginal rise of 0.4% compared to the corresponding period last year.

    One of the major concerns is the continuing rise in interest expenses. The company's non-convertible debenture issue in February 2002 was downgraded by Crisil. The apex rating agency downgraded its rating sighting severe profitability pressure from its core business i.e. tractors. However, one can expect interest costs to decline in the long run as Escorts would retire debts from the surplus funds.

    The stock currently trades at Rs 61 implying a P/E multiple of 54x FY02 earnings. The management has identified farm equipments, health care and telecom as the group's focus areas in the future. On the telecom front, Escotel (cellular service provider) had an all-India market share of around 8% in FY02 with a mobile subscriber base of around 500,000 levels. In FY02, it won licences to provide cellular services in four states viz. Rajasthan, Himachal Pradesh, Uttar Pradesh (East) and Punjab. Since expansion requires heavy investments towards expanding networks, the cellular arm is expected to rope-in a strategic investor. While prospects for the tractor industry in the long run are promising, the company has to accelerate its exit strategy and use proceeds to streamline its identified core operations. This is vital for the survival of the company in the long run.

     

     

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