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Escorts: On a exit mode

Dec 4, 2002

While it has been eventful year for most of the auto companies, it is not the case with tractor manufacturers. They have been affected by poor offtake. However, Escorts' performance has been weaker compared to its peers. The slowdown in demand combined with significant pricing pressure has resulted in the company posting a bigger loss in 2QFY03 compared to the corresponding period previous year.

(Rs m) 2QFY02 2QFY03 Change 1HFY02 1HFY03 Change
Net sales 1,653 1,627 -1.6% 4,153 3,300 -20.5%
Other Income 35 7 -81.3% 559 22 -96.2%
Expenditure 1,785 1,856 4.0% 4,091 3,676 -10.1%
Operating Profit (EBDIT) (133) (229) 72.8% 62 (376) -
Operating Profit Margin (%) -8.0% -14.1%   1.5% -11.4%  
Interest 152 140 -7.6% 305 325 6.6%
Depreciation 95 97 2.1% 201 202 0.3%
Profit before Tax (345) (460) - 115 (881) -
Extraordinary items - 41 - (33) 6 -
Tax (75) (15) - 20 (175) -
Profit after Tax/(Loss) (270) (403) 49.6% 63 (700) -
Net profit margin (%) -16.3% -24.8%   1.5% -21.2%  

The sector has been negatively impacted by volatile agricultural sector performance in the last three years, poor monsoon in select states and significant rise in capacity with the entry of multinationals continues to have a large impact on the indian tractor sector. However, there are factors internal to Escorts that are responsible for its poor performance which is indicated by the fact that tractor volumes for the first half of the current fiscal are lower by almost 44% to 8,031 units. Escorts' tractor sales have been erratic ever since a labour strike that the company had to deal with in August-November 2001. After losing significant market share during this period, the company went on an production spree that resulted in tractor sales increasing at a stellar rate of 46% in 4QFY02 (i.e. January-March 2002). But this proved to be a temporary measure. Escorts has once again reverted back to a destocking exercise, which is reflected in its 1HFY03 financials. This means lower production.

Lower capacity utilisation has negated benefits arising from reduction in employee costs to a large extent in 1HFY03. Operating margins, as a result, has also plummeted sharply in 1HFY03. As per our estimates, tractor industry sales have fallen by 10% in 1HFY03 to 81,336 units (excluding foreign players like John Deere). We expect demand scenario to worsen in 2HFY03 in light of poor monsoon (14 states are facing a drought) in the current fiscal year thus resulting in a 20% fall in volume sales for FY03. Escorts is also likely to post similar performance, as far as the tractor division is concerned.

The company has entered into an agreement to divest its entire 40% stake in Escorts JCB Ltd, which is expected to fetch Rs 2,140 m for Escorts. Pending certain regulatory clearances, this income is not accounted for in 2QFY03 numbers. Apart from this, the company has also divested its entire 60% stake in Escorts Class that has resulted in a profit of Rs 582 m, which is included in the extraordinary income in 2QFY03. The company has utilised the surplus proceeds to retire some high cost debts that is evident from lower interest outflow in 2QFY03.

The stock currently trades at Rs 48 implying a P/E multiple of 9.5x FY04E earnings. The company is scouting for a equity partner for its cellular telephony venture, Escotel, which is a positive for the parent company. As of June 2002, Escotel's total number of subscribers stood at 571,887 that translates into a market share of 8%. This combined with exit from identified non-core businesses are the key triggers for the stock price (We expect the company to divest its stake in Escorts Mahle in the near future).

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