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Escorts: Restructuring benefits? - Views on News from Equitymaster
 
 
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  • Dec 14, 2000

    Escorts: Restructuring benefits?

    Escorts Ltd, the tractor major, has seen its performance deteriorate over the past year. The slowdown in the tractor industry has taken its toll on the company's bottomline. Though in 1HFY01, Escorts net profit grew by 71% YoY to Rs 931 m, this was mainly due an extraordinary gain of Rs 1.1 bn from sale of its 24% stake in Escorts Yamaha. The company's operating profit for 1HFY01, declined by 34% YoY due to lower tractor volumes during this period.

    The company's restructuring process which started a few years ago, has yet to show the desired results. However we believe its heading in the right direction. The company, in future plans to concentrate on telecom, agriculture, health and information technology. This is probably because these areas of its business are performing well. Its telecom subsidiary, Escotel's subscriber base has grown by 100% in the past year. The company enjoys the highest market share in Kerala, Haryana and West Uttar Pradesh.
    (Rs m) 1HFY00 1HFY01 Change
    Sales 6,556 5,637 -14.0%
    Expenditure 5,629 5,028 -10.7%
    Operating Profit (EBDIT) 928 609 -34.4%
    Operating Profit Margin (%) 14.2% 10.8%  
    Extraordinary gains - 1,051  
    Profit after Tax/(Loss) 545 930 70.8%
    Net profit margin (%) 8.3% 16.5%  

    As part of this restructuring it has decided to reduce its stake in several group companies. In its future plans, divestment assumes importance and surplus funds received from this will be used to retire the debt of the company and improve its cash flows.

    Its business process re-engineering (BPR) exercise will improve employee productivity and reduce material costs, so as to increase its operating margins. As per the recommendations of Andersen Consulting, the company hopes to reduce material costs by Rs 8,000 per tractor per annum. Though the company did manage to control costs in the 1HFY01, the declining tractor market has not resulted in an improvement in its operations.

    In the past two years with a view to focusing on the above core areas, Escorts has reduced its stake in Escorts JCB (their construction equipment arm) to 40%, Escorts Yamaha to 26% and Hughes Escorts Communications to 26%. This has resulted in an inflow of approximately Rs 2 bn.

    The company's share price performance has been dismal in the current year. From a high of Rs 263 in February 2000, it is currently trading at Rs 113. This has been due to declining volumes in the tractor industry coupled with the fact that the company's restructuring exercise is yet to show desired results. Though the 2H is expected to be better for the tractor industry, the overall performance for the current year is expected to be dismal.

    Tractor major market shares
    (%) 1HFY00 1HFY01
    M & M 27.4% 32.9%
    Escorts 19.0% 16.9%
    PTL 19.0% 18.2%
    Massey 17.0% 11.4%
    Eicher 7.1% 6.5%

    The future prospects however look better as the company is on the right track. Tractors, though dependant on the vagaries of the monsoon will always assume importance in India due to the fact that ours is an agrarian economy.

    On the current price of Rs 113, Escorts is trading at 8.2x FY01E EPS of Rs 13.8.

     

     

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