Retail Equity Research - PDF document

February 13, 2015 Retail Equity Research Result Update Escorts reported revenues of ~| 1046 crore vs. our estimate of ~| 1104 crore (YoY decline of ~11%) owing to ~16% YoY decline in tractor volumes (~16,053 units) EBITDA margins at 4.7% were ~321 bps lower YoY but ~130 bps higher QoQ affected by below expectations performance in the tractor and railway segment. However, the construction equipment business has bounced Escorts (ESCORT) | 127 Rating matrix Rating:HoldTarget:| 131Target Period:12 monthsPotential Upside: What’s changed? TargetChanged from | 103 to |131EPS FY15EChanged from | 12.7 to | 12.9EPS FY16EChanged from | 18.7 to | 22.4RatingChanged from Sell to Hold Quarterly performance (| crore)Q3FY15Q3FY14YoY (%)Q2FY15QoQ (%)Revenues1,046.41,175.9-11.0992.65.4EBITDA49.092.8-47.233.546.1EBITDA (%)4.77.9-321 bps3.4130 bps Key financials | CroreFY14FY15EFY16EFY17ENet Sales6,268 4,035 4,172 4,798 EBITDA381.3 181.1 253.7 392.6 Net Profit244.8 82.0 154.4 267.1 FDEPS (|)20.5 6.9 12.9 22.4 *FY14E numbers are for 18 months (Oct’12 to Mar’14) Valuation summary Stock data ParticularAmount Price performance 1M3M6M12MEscorts Ltd-11.5-26.70.6-8.4 M&MLtd - 7.9 - 7.4 - 7.3 27.6 Research Analyst nishant.vass@icicisecurities.com Retail Equity Research Variance analysis Q3FY15Q3FY15EQ3FY14YoY (%)Q2FY15QoQ (%)CommentsTotal Operating Income1,046.41,103.81,175.9-11.0992.65.4Largely in line with estimates as tractor volumes dip ~9% YoY Change in estimates (| Crore)OldNew% ChangeIntroducedCommentsRevenue4,7774,172-12.74,798Volume estimates have been cut for industry on the back of a sharp fall in overall industry volumes in FY15EEBITDA329254-22.9393EBITDA Margin (%)6.96.1-80 bps8.2Margin estimates reduced on increase in raw material costs and slow revival of other subsidiaries Source: Company, ICICIdirect.com Research Assumptions CurrentEarlierCommentsFY14FY15EFY16EFY17EFY16EFY17ETractor volumes (nos)100,81561,36161,32169,90169,62974,700 Retail Equity Research Company Analysis Growth rates to be steady, going ahead, after strong growth year Escorts is the third largest manufacturer of tractors in India with a market share of 11.1% (FY14) in a market dominated by M&M and TAFE. We expect revenues to grow to ~| 4813 crore in FY17E (~9% CAGR FY15E- 17E). The growth is likely to come not only from the farm equipment segment but also from the other segments like construction equipment, which are likely to improve with an improvement in an overall macroeconomic scenario. Growth in revenues 3,8944,8134,1874,0566,29240.861.6(35.5)3.215.0SY12FY14FY15EFY16EFY17E(| crore)(60)(40)(20)(%) Total Operating income Growth (%) Source: Company, ICICIdirect.com Research *FY14E numbers are for 18 months (Oct’12 to Mar’14) The tractor segment continues to be the main segment for Escorts while the construction equipment segment, where Escorts manufactures backhoe loaders, has been struggling with a slowdown in the economy. Going ahead, we expect some revival in the segment registering decent volumes. Segmental split in ESC revenues 2,912 5,123 3,267 3,299 3,847 749 763 529 587 640 115 109 101 143 149 256 225 200 1781,0002,0003,0004,0005,0006,0007,000SY12FY14FY15EFY16EFY17E(| crore) Tractors Construction Equipment Auto Ancillary Railway Equipment Source: Company, ICICIdirect.com Research *FY14E numbers are for 18 months (Oct’12 to Mar’14) Retail Equity Research Domestic tractor industry volumes and growth trends 30462253689152776863048432.211.3-1.719.5-8.319.8FY09FY10FY11FY12FY13FY14YTD-20-10 Total Volumes Growth (%) Source: Company, Crisil Research,, ICICIdirect.com, Research Segmental share in domestic tractor industry 17171515101111 1213FY09FY10FY11FY12FY13FY14YTD Up to 30 HP 31-40 HP 41-50 HP 51 HP and above Source: Company, Crisil Research, ICICIdirect.com, Escort’s share in the tractor segment has remained subdued as market leaders M&M and TAFE have aggressively grown across geographies and segments. Escorts has recently entered the higher �HP (50 HP) segment and still remains a marginal player in that category. Escorts’ market share in the 31-40 HP segment appears higher in FY14 due to reclassification of certain tractors from 30 HP to 31 HP (thus there was a steep decline in the ment for Escorts). Trend in P tractor segment- Domestic 8222414.512.612.510.53.40.80.9FY09FY10FY11FY12FY13FY14YTD(units)(%) Industry Escorts Share Source: Company, Crisil Research,ICICIdirect.com, Research, *change in classification post FY13 Trend in 31-40 HP tractor segment- Domestic 1529412143482444312333972233028.49.49.37.611.514.313.9FY09FY10FY11FY12FY13FY14YTD(units)(%) Industry Escorts Share Source: Company, ICICIdirect.com, Research Crisil Research,*change in classification post FY13 Trend in 41-50 HP tractor segment- Domestic 9418313718014310230881029.128.025.223.615.610.99.7FY09FY10FY11FY12FY13FY14YTD(units)(%) Industry Escorts Share Source: Company, ICICIdirect.com, Research Crisil Research, �Trend in 50 HP tractor segment- Domestic 290536713424599275610.00.00.00.04.06.49.8FY09FY10FY11FY12FY13FY14YTD(units)(%) Industry Escorts Share Source: Company, ICICIdirect.com, Research Crisil Research, Retail Equity Research EBITDA margins to improve from current lows as utilisation levels improve Historically, Escort’s margins have been under pressure despite peers like M&M who have seen strong double digit margins. The management has guided at improving margins from last year. There have been some green shoots with ECEL and tractor business showing signs of improvement. Delivery of the same, going ahead, is the key monitorable. Going ahead, Escorts is likely to witness an improvement in margins over FY16E, FY17E as the impact of operating leverage, costs savings exercises swings margins significantly. Also, with an improvement in the construction equipment segment, operating profits are likely to improve. We build in 6.1%, 8.2% margins for FY16E, FY17E, respectively. Margins, costs annual trends and forecasts 182.2381.3381.3253.7392.64.76.19.46.18.2100150200250300350400450SY12FY14FY14FY16EFY17E(| crore(%) EBITDA EBITDA Margins (%) Source: Company, ICICIdirect.com Research *FY14E numbers are for 18 months (Oct’12 to Mar’14) EBITDA margins- Quarterly trend 70.971.471.567.971.571.271.570.470.57.96.86.13.45.45.24.75.04.7Q1FY14Q2FY14Q3FY14Q4FY14Q5FY14Q6FY14Q1FY15Q2FY15Q3FY15(%)(%) Raw materials EBITDA margins Source: Company, ICICIdirect.com Research Retail Equity Research Tractor ASPs on an uptrend 480,203508,188532,402538,054550,3523.35.84.81.12.3440,000460,000480,000500,000520,000540,000560,000SY12FY14FY15EFY16EFY17E(| crore)(%) Tractor ASPs Growth (%) Source: Company, ICICIdirect.com Research Expect improvement in profitability as topline, margins grow We expect an improvement in volumes and margins to impact the profitability positively. In SY08-10, Escorts’ profit margins were on an average at 8.6%. However, SY11, SY12 saw the same dip to lowly 4.6%. With an improvement in volumes over the past year, profit margins have seen a pick-up to 6.1%. Going ahead, with an improvement in overall performance, we build in profits to grow to ~| 200 crore (PAT margin: 4.3%). Increase in profitability continues as higher tractor utilisation scales up margins (49.4)251.7(66.5)88.273.1SY12FY14FY15EFY16EFY17E(| crore)(100)(50)(%) Growth (%) Source: Company, ICICIdirect.com Research *FY14E numbers are for 18 months (Oct’12 to Mar’14) ASPs are likely to remain on an uptrend as the share of higher HP tractors increases. Also, the management has guided at passing cost side increases as sentiments in the market improve. With initiatives like Ferrari range of tractors, the management expects a further improvement Retail Equity Research High cost of interest despite low D/E profile In the last six years, Escorts has had an average cost of debt at ~19%, which considering the low D/E (average D/E over the period is 0.2) is quite high. Since the majority of the capex is already done, we expect debt to reduce over the next two years as also, subsequently, the interest costs. However, this does remain an area of concern for us. Significantly high cost of interest a worry 459.9350.4350.4300.4300.421.031.615.716.015.5SY12FY14FY15EFY16EFY17E(| crore)(%) Debt Interest (%) Source: Company, ICICIdirect.com Research *FY14E numbers are for 18 months (Oct’12 to Mar’14) Return ratios inch to Escorts’ return ratios have historically been very low and have been reflective of the poor operating performance of the company. Also, capital allocation has been an issue as capital has been blocked in unprofitable/low margin businesses. For FY14, return ratios appear inflated as FY14E consists of six quarters due to a change in accounting year. Going forward, we expect return ratios to improve to double digit levels in FY17E. Return ratios to improve as asset turn improves on better utilisation 6.54.312.78.1 5.313.713.44.37.611.8SY12FY14FY15EFY16EFY17E(%) ROCE ROE Source: Company, ICICIdirect.com Research *FY14E numbers are for 18 months (Oct’12 to Mar’14) Retail Equity Research Outlook & valuation We believe winners in the overall auto space are companies with superior delivery of earnings as investors seek comfort in auto companies on the earnings front. The increasing focus is on capital allocation vs. return on capital allocated by companies. We, thus, feel both tractor industry wise/stock specific Escorts needs to deliver a consistent improvement in earnings before warranting a multiple upgrade. Thus, we value the stock at 6x FY17E EPS and introduce the FY17E earnings at an EPS of | 22.4. We arrive at an upgraded target price of | 131. We change our rating on the stock from SELL to Valuations Sales Growth EPS Growth PE EV/EBITDA RoNW RoCE (| cr)(%)(|)(%)(x)(x)(%)(%)FY14 6,267.6 95.2 20.5 74.9 6.2 4.5 13.4 13.7 FY15E4035.3-35.66.9-66.518.59.04.35.3FY16E 4,171.7 3.4 12.9 88.2 9.8 6.6 7.6 8.1 FY17E4798.015.022.473.15.73.711.812.7 Source: Company, ICICIdirect.com Research *FY14E numbers are for 18 months (Oct’12 to Mar’14) Retail Equity Research Company snapshot Target Price: 131 Dec-10Mar-11Jun-11Sep-11Dec-11Mar-12Jun-12Sep-12Dec-12Mar-13Jun-13Sep-13Dec-13Mar-14Jun-14Sep-14Dec-14Mar-15Jun-15Sep-15Dec-15(|) Source: Bloomberg, Company, ICICIdirect.com Research Key events DateEventJan-08Escorts discloses weak quarterly financials on PAT; company turns into a loss for Q1SY08 on weak operating performanceDec-08Escorts continues weak bottomline performance even though EBITDA margins improve to ~8% levels on account of one-off costs of ~| 18 croreFeb-09Escorts ties up with Bank of Rajasthan for tractor and dealer financingNov-09Escorts reports strong EBITDA margins at 12.6% on account of sales growth of ~12% on YoY basis; however profits inflated via tax write-backsJan-10Escorts management targets cost cutting initiatives to improve margins Mar-10Escorts business performance improves, profit levels improve owing to positive tractor cycle prior to onset of monsoon,lower costs Nov-10Escorts reports annual SY10 results witnesses unexpected rise in other expenses to 18% of net sales led by management payoutsJan-11Escorts barely breaks even after weak operating performance results in Q3SY11Oct-11Escorts reports results with ~61% rise in debt levels along with weak operating performance for SY11Feb-12Escorts announces merger of three group companies, of which Escorts' construction business is mainApr-12Promoters hike stake by ~4% in Escorts amid speculation of a takeover battle brewingMay-13Management says Escorts to launch heavy duty tractors in 2015 along with improved results in Q2SY13Aug-13Escorts witnesses buying interest from "Dalal Street bull" Rakesh Jhunjhunwala. Purchases 5% stake in the companyOct-13Escorts reports improved financial performance with profit of | 168 crore for four trailing quarters. Company also extends financial year to MarchSource: Company, ICICIdirect.com Research Top 10 Shareholders Shareholding Pattern RankNameLatest Filing Date% O/SPosition (m)Change (m)1Dave (Surendra Ambalal)31-Dec-1430.4337.30.002Harparshad & Company Pvt. Ltd.31-Dec-147.589.30.003Jhunjhunwala (Rakesh Radheshyam)31-Dec-145.476.70.004Gupta (Pradeep Kumar)31-Dec-142.693.3-0.015DSP BlackRock Investment Managers Pvt. Ltd.31-Dec-142.523.10.556Norges Bank Investment Management (NBIM)31-Dec-141.481.80.487Big Apple Clothing Pvt. Ltd.31-Dec-141.451.80.008AAA Portfolio Pvt. Ltd.31-Dec-141.381.70.009Dimensional Fund Advisors, L.P.30-Sep-141.121.4-1.1710Nanda (Rajan)31-Dec-140.851.00.00 (in %)Dec-13Mar-14Jun-14Sep-14Dec-14Promoter42.042.042.042.042.0FII9.46.95.26.78.3DII2.12.24.03.94.3Others46.549.048.847.545.4Source: Reuters, ICICIdirect.com Research Investor nameValueSharesInvestor nameValueSharesDSP BlackRock Investment Managers Pvt. Ltd.1.12m 0.55m Principal PNB Asset Management Company Ltd.-2.87m -1.37m Norges Bank Investment Management (NBIM)0.98m 0.48m Dimensional Fund Advisors, L.P.-2.57m -1.17m Mellon Capital Management Corporation0.85m 0.41m Canara Robeco Asset Management Company Ltd.-1.91m -0.78m APG Asset Management0.68m 0.31m Tata Asset Management Limited-1.02m -0.50m Russell Investments Limited0.35m 0.16m The Vanguard Group, Inc.-0.35m -0.29m BuysSellsSource: Reuters, ICICIdirect.com Research Retail Equity Research Page 10 Financial summary Profit and loss statement | Crore (Year-end March)FY14FY15EFY16EFY17ETotal operating Income6,291.54,056.24,186.94,813.2Growth (%)61.6-35.53.215.0Raw Material Expenses1,862.72,315.42,844.53,042.8Employee Expenses667.4447.3463.2513.2Other expenses381.5443.4496.9557.6Total Operating Expenditure5,910.33,875.13,933.24,420.7EBITDA381.3181.1253.7392.6Growth (%)333.5-52.540.154.7Depreciation83.262.464.967.4Interest110.655.248.146.6Other Income81.550.152.155.2PBT272.382.9192.9333.9Total Tax27.50.938.666.8PAT244.882.0154.4267.1Growth (%)251.7-66.588.273.1EPS (|)20.56.912.922.4 Source: Company, ICICIdirect.com Research *FY14E numbers are for 18 months (Oct’12 to Mar’14) Cash flow statement | Crore (Year-end March)FY14FY15EFY16EFY17EProfit after Tax244.882.0154.4267.1Add: Depreciation83.262.464.967.4(Inc)/dec in Current Assets-5.6140.5-101.9-128.9Inc/(dec) in CL and Provisions-36.6-73.97.7146.8CF from operating activities285.8211.0125.0352.4(Inc)/dec in Investments0.2-10.0-20.00.0(Inc)/dec in Fixed Assets-110.5-129.2-127.0-107.0Others0.00.00.00.0(Inc)/dec in Deferred Tax Asset-10.21.60.00.0CF from investing activities -118.8-129.5-162.0-123.8Issue/(Buy back) of Equity11.60.017.00.0Inc/(dec) in loan funds-109.50.0-50.00.0Dividend paid & dividend tax-25.8-25.1-27.9-30.7Inc/(dec) in Sec. premium0.00.00.00.0Others-13.210.7-17.00.0CF from financing activities-136.9-14.4-77.9-30.7Net Cash flow30.167.0-114.9197.9Opening Cash130.6160.7227.7112.9Closing Cash160.7227.7112.9310.8 Source: Company, ICICIdirect.com Research *FY14E numbers are for 18 months (Oct’12 to Mar’14) Balance sheet | Crore (Year-end March)FY14FY15EFY16EFY17ELiabilitiesEquity Capital119.3119.3119.3119.3Reserve and Surplus1,712.11,779.71,906.12,142.5ESOP0.00.00.00.0Total Shareholders funds1,831.41,898.92,025.42,261.8Total Debt350.4350.4300.4300.4Other non-current Liabilities29.629.629.629.6Long-term Provisions118.2118.2118.2118.2Total Liabilities2,329.62,397.22,473.62,710.0AssetsGross Block2,380.62,480.62,600.62,700.6Less: Acc Depreciation757.0812.4870.2930.5Net Block1,623.61,668.21,730.41,770.0Capital WIP30.030.030.030.0Total Fixed Assets1,653.51,698.21,760.31,800.0Net Intangible Asset26.648.848.848.8Investments381.5391.5411.5411.5Inventory551.0466.2539.6617.2Debtors352.4342.7342.9394.4Loans and Advances249.9206.1231.9233.4Other Current Assets3.61.43.82.2Cash160.7227.7112.9310.8Total Current Assets1,317.61,244.11,231.11,557.9Creditors829.7796.0800.1920.2Provisions & Other Curr.Liab333.4293.2296.8323.5Total Current Liabilities1,163.11,089.21,096.91,243.7Net Current Assets154.5154.9134.3314.3Deferred Tax Asset7.45.75.75.7Other non-current assets106.198.1113.0129.7Application of Funds2,329.62,397.22,473.62,710.0 Source: Company, ICICIdirect.com Research *FY14E numbers are for 18 months (Oct’12 to Mar’14) Key ratios (Year-end March)FY14FY15EFY16EFY17EPer share data (|)EPS20.56.912.922.4Cash EPS27.512.118.428.0BV153.6159.2169.8189.6DPS1.81.82.02.2Cash Per Share13.519.19.526.1Operating RatiosEBITDA Margin (%)6.14.56.18.2PBT / Net sales (%)4.32.14.67.0PAT Margin (%)5.03.71.83.9Inventory days30.546.044.044.0Debtor days20.531.030.030.0Creditor days48.372.070.070.0Return Ratios (%)RoE13.44.37.611.8RoCE13.75.38.112.7RoIC14.05.68.213.9Valuation Ratios (x)P/E6.218.59.85.7EV / EBITDA4.59.06.63.7EV / Net Sales0.30.40.40.3Market Cap / Sales0.20.40.40.3Price to Book Value0.80.80.70.7Solvency RatiosDebt/EBITDA0.91.91.20.8Debt / Equity0.20.20.10.1Current Ratio1.11.11.11.3Quick Ratio1.00.91.01.0 Source: Company, ICICIdirect.com Research *FY14E numbers are for 18 months (Oct’12 to Mar’14) Retail Equity Research Page 11 ICICIdirect.com coverage universe (Auto & Auto Ancillary) CMPM Cap(|)TP(|)Rating(| Cr)FY15EFY16EFY17EFY15EFY16EFY17EFY15EFY16EFY17EFY15EFY16EFY17EFY15EFY16EFY17EAmara Raja (AMARAJ)887932Hold15,15925.134.042.335.426.121.020.916.513.133.934.033.025.026.425.6Apollo Tyre (APOTYR)182228Buy9,19519.521.422.89.38.58.05.55.55.319.316.615.317.916.515.1Ashok Leyland (ASHLEY)6768Hold18,8431.22.13.553.931.719.321.915.311.66.711.014.96.610.816.0Bajaj Auto (BAAUTO)2,2602,833Buy65,398111.8155.5180.020.214.512.611.89.17.338.039.440.429.934.833.7Balkrishna Ind. (BALIND)694734Buy6,70444.156.566.813.610.69.08.76.65.414.417.619.918.714.417.6Bharat Forge (BHAFOR)1,1841,178Hold27,59733.943.352.934.927.322.416.513.611.525.225.826.724.525.025.1Bosch (MICO)26,50018,462Hold83,210334.6494.1600.047.832.426.730.921.617.114.818.518.915.319.821.2Eicher Motors (EICMOT)16,67015,000Hold45,026253.0443.9682.265.937.624.431.517.811.224.733.837.926.232.834.7Escorts (ESCORT)128131Hold1,5316.912.922.418.59.85.79.06.63.75.38.112.74.37.611.8Exide Industries (EXIIND)176220Buy14,9266.08.411.429.120.915.418.814.010.417.821.925.812.715.818.6Hero Mototcorp (HERHON)2,8473,036Hold56,852128.8166.2202.422.117.114.114.616.315.146.852.552.439.442.842.8JK Tyre & Ind (JKIND)119171Buy2,70915.222.926.37.85.24.55.34.13.419.922.824.126.730.928.1M&M (MAHMAH)1,1671,457Buy68,90859.374.584.819.715.713.814.08.67.518.920.120.619.819.318.9Maruti Suzuki (MARUTI)3,5914,000Hold108,522117.0155.1200.030.723.218.016.513.010.214.717.419.614.816.918.6Motherson (MOTSUM)466512Buy41,0929.116.927.351.227.617.114.510.77.322.227.635.824.836.341.6Tata Motors (TELCO)562600Hold170,27661.572.980.59.17.77.04.23.73.323.622.421.223.722.419.9Wabco India (WABTVS)5,2986,000Buy10,06667.2117.8166.778.845.031.847.031.122.114.720.923.218.524.327.6Sector / CompanyRoE (%)EPS (|)P/E (x)EV/EBITDA (x)RoCE (%) p an ICICIdirect.com Researc h *FY14E numbers for Esc o rts are for 18 months ( Oct’12 to Mar’14 ) Retail Equity Research Page 12 ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns ratings to its stocks according to their notional target price vs. current market price and then categorises them as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock. Strong Buy:� 15%/20% for large caps/midcaps, respectively, with high conviction; �Buy: 10%/15% for large caps/midcaps, respectively; Head – Researchpankaj.pandey@icicisecurities.comICICIdirect.com Research Desk, ICICI Securities Limited, Road No 7, MIDC, Mumbai – 400 093 research@icicidirect.com Retail Equity Research Page 13 ANALYST CERTIFICATION We /I, Nishant Vass, MBA (Finance) Research Analyst, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Terms & conditions and other disclosures: ICICI Securities Limited (ICICI Securities) is a full-service, integrated investment banking and is, inter alia, engaged in the business of stock brokering and distribution of financial products. ICICI Securities is a wholly-owned subsidiary of ICICI Bank which is India’s largest private sector bank and has its various subsidiaries engaged in businesses of housing finance, asset management, life insurance, general insurance, venture capital fund management, etc. (“associates”), the details in respect of which are available on www.icicibank.com. ICICI Securities is one of the leading merchant bankers/ underwriters of securities and participate in virtually all securities trading markets in India. 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