Escorts Initiate Coverage CS
Escorts Initiate Coverage CS
Escorts Initiate Coverage CS
Asia Pacific/India
Equity Research
Automobile Manufacturers
DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST
CERTIFICATIONS, LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit
Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware
that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report
as only a single factor in making their investment decision.
30 November 2017
18MFY14
FY04-Jun
FY05-Sep
FY06-Sep
FY07-Sep
FY08-Sep
FY09-Sep
FY10-Sep
FY11-Sep
FY12-Sep
FY02
FY03
FY15
FY16
FY17
FY14-21E vol. CAGR 7 5%
FY21E vol. 890,000
Escorts - domestic tractor volumes Market share(RHS)
Implied FY17-21E CAGR 11%
Source: Industry data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
Figure 3: M&A activity has consolidated tractor Figure 4: Escort's EBIT margins still ~500 bp lower
industry; resulting in better EBIT margins than industry; lot of scope to improve
100% 21.0
8% 6%
14% 8%
6%
29% 4%
80% 12% 11% 18.0
14%
5% TAFE 10% 13%
bought 12% M&M 15.0
60% 14%
Eicher bought
25% 21%
Punjab 12.0
11% 24% Tractors
40%
13%
9.0
20% 41% 43%
28% 32% 6.0
FY11 FY12 FY13 FY14 FY15 FY16 FY17
0%
FY04 FY07 FY13 FY17
EBIT % of Escorts - tractors (%) M&M tractors
Mahindra TAFE International tractors Escorts John Deere Others
Intl. tractors (Sonalika)
Source: Industry data, Credit Suisse estimates Source: Industry data, Credit Suisse estimates
Figure 5: Construction margins to improve with Figure 6: Escorts has fastest earnings growth and
cycle and cost reduction efforts lowest multiple amongst Indian Auto OEMs
800 10.0 40.0 40%
8.0 35.0 35%
600
6.0
400 30.0 30%
4.0
200 25.0 25%
2.0
- 20.0 20%
-
(2.0) 15.0 15%
(200)
(4.0)
10.0 10%
(400)
(6.0)
5.0 5%
(600) (8.0)
FY14*
FY18E
FY19E
FY20E
FY07
FY08
FY09
FY10
FY11
FY12
FY15
FY16
FY17
- 0%
Bajaj Hero TVS Maruti M&M Eicher Escorts
Construction equip. EBIT (Rs mn) EBIT margin (RHS) FY19 PE (X) FY20 PE (X) FY17-20 EPS CAGR (RHS)
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
Figure 8: Early 2000s period saw losses in multiple segments, including Agri
machinery and telecom forcing group to exit multiple non-core businesses
6,000 6,000
5,000 5,000
4,000 4,000
3,000 3,000
2,000 2,000
1,000 1,000
- -
(1,000) (1,000)
(2,000) (2,000)
FY04-Jun
18MFY14
FY05-Sep
FY06-Sep
FY07-Sep
FY08-Sep
FY09-Sep
FY10-Sep
FY11-Sep
FY12-Sep
FY03
FY15
FY16
FY17
Agri-machinery EBIT (Rs mn) Construction Equipment Auto Ancillary
Other Operations Telecom Railway Equipments
Healthcare Total (RHS)
Figure 9: Auto components was loss making at EBIT level for past ten years
2,500 0%
2,000 -5%
1,500 -10%
1,000 -15%
500 -20%
- -25%
FY07-Sep FY08-Sep FY09-Sep FY10-Sep FY11-Sep FY12-Sep 18MFY14 FY15 FY16 FY17
Figure 10: Escorts cut down on capex in FY04-07; focus back on new products
in FY11-14 period
2,000
Escorts cut down on capex, dividend Capex spend in FY12-14 on new products, R&D
payout during FY04-07
1,500
1,000
500
(500)
FY04-Jun
18MFY14
FY05-Sep
FY06-Sep
FY07-Sep
FY08-Sep
FY09-Sep
FY10-Sep
FY11-Sep
FY12-Sep
FY02
FY03
FY15
FY16
FY17
Capex (net of sale) (Rs mn) Dividend outflow
Figure 11: Lack of investments in new products led to a sharp decline in market
share from 15%+ to ~10% levels; share loss stabilised now
120,000 18%
17%
100,000
16%
15%
80,000
14%
60,000 13%
12%
40,000
11%
10%
20,000
9%
- 8%
FY04-Jun
18MFY14
FY05-Sep
FY06-Sep
FY07-Sep
FY08-Sep
FY09-Sep
FY10-Sep
FY11-Sep
FY12-Sep
FY02
FY03
FY15
FY16
FY17
Figure 12: Escorts’ current profitability much lower than competition; there is
enough room to improve margins
21.0
18.0
15.0
12.0
9.0
6.0
FY11 FY12 FY13 FY14 FY15 FY16 FY17
EBIT margin of Escorts - tractors (%) M&M tractors Intl. tractors (Sonalika)
Escorts numbers based on quarterly results for FY11-14 period. Source: Company data, Capitaline
In June 2014, the company started Project Shikhar with McKinsey to focus on improvement
in gross margins. Firstly, Escorts rationalised the number of suppliers and reduced them by
25%. Furthermore, its R&D team worked on the design of the vehicles to come up with less
expensive models/raw materials, which could provide similar level of strength and
performance. Over the years, tractors had started carrying features which customers no
longer valued and those were removed. RM cost optimisation is clearly visible in the past
three-four years although the sharp fall in FY16 was aided by decline in commodity prices.
Figure 13: Gross margins improved ~500 bp largely on focused reduction effort
50,000 74.0%
40,000 72.0%
30,000 70.0%
20,000 68.0%
10,000 66.0%
- 64.0%
FY04-Jun
18MFY14
FY05-Sep
FY06-Sep
FY07-Sep
FY08-Sep
FY09-Sep
FY10-Sep
FY11-Sep
FY12-Sep
FY03
FY15
FY16
FY17
1H18
Apart from its own cost reduction efforts, gross margin improvement in the last few years
has been driven by lower commodity prices (steel and rubber are most relevant for
tractors) and operating leverage (as industry volumes saw a cyclical bounce).
Figure 14: Low commodity prices have helped Figure 15: Demand growth in FY17 provided
margins in last few years but at same level as FY11 tailwind for volumes, operating performance
40 250 750 45%
600 30%
35 200
450 15%
30 150
300 0%
25 100
150 -15%
20 50
- -30%
Apr-08
Apr-09
Apr-10
Apr-11
Apr-12
Apr-13
Apr-14
Apr-15
Apr-16
Apr-17
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
Steel (Rs/Kg) Rubber (Rs/ Kg) Tractors' domestic volumes ('000) % yoy (RHS)
Source: Bloomberg, Credit Suisse estimates Source: Tractor Manufacturers Association, Credit Suisse estimates
Figure 16: Cycles typically last 7-8 years; volume CAGR over past two cycles
was 6.4% p.a.
Tractors cycles (peak to peak) Length of cycle (years) CAGR cycle
FY85-92 7 9%
FY92-00 8 9%
FY00-07 7 2%
FY07-14 7 11%
Source: Industry data, Credit Suisse estimates
Even a ~5% growth in current cycle implies 10% growth for next 3 years
In order to estimate likely volume growth trend over the current cycle (FY14-21E), we first
look at average growth trend over the past two cycles (to smoothen the impact), which
was 6.4% over FY00 to FY14. In the current cycle, we have seen two weak years (FY15,
FY16) leading to a 22% decline from peak, followed by two strong growth years in FY17
(18%) and FY18E (~14% growth) leading to the industry crossing the previous peak. If we
assume that this cycle (FY14-21) will see 5% CAGR (lower than 6.4% seen over FY00-14
and much lower than recent FY07-14 CAGR of 11%), volumes could peak at ~900k in
FY21E. This level implies 10% CAGR from FY18-21E.
In addition to the cycle, we see additional factors being supportive for tractor demand in
FY19E. These include benefits from farm loan waiver (states accounting for ~65% of
tractor volumes have seen farm-loan waiver), pre-general election spend by government
and continuation of infra spending. Based on these tailwinds, we believe that our
expectation of 10% volume growth in FY19E should pan out. Post FY19E, we build
moderation in volume growth to 5% even though if cycle were to play out in line with past
trends, there could be positive surprise on growth. However, the disruption in government
capex during elections, and any changes post the elections can have an impact on infra
capex during FY20E, which may act as a dampener in demand, especially after three
years of reasonable growth in volumes.
One year of weak monsoons doesn’t impact growth trend materially
Another factor in tractor demand is related to monsoons. We highlight that if monsoons fail
successively over two years, demand tends to fall down materially. On the other hand, if
deviation is not large (in 0-5% range), it doesn’t impact tractor demand as much. In FY17
and FY18, rainfall has seen small deviations from normal level while the cycle has been
supportive (recovery from de-growth years of FY15 and FY16). Going forward, unless
monsoons are below normal for two years in succession, we believe that volume traction
should remain healthy in FY19 and FY20.
15%
20%
10%
10%
5%
0% 0%
-5%
-10%
-10%
-20%
-15%
-30% -20%
FY18E
FY89
FY90
FY91
FY92
FY93
FY94
FY95
FY96
FY97
FY98
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
Tractors growth Rainfall deviation from normal
60.0 64
50.0 48
40.0 32
30.0 16
20.0 0
10.0 -16
- -32
FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17
0%
FY04 FY07 FY13 FY17
Post the industry consolidation, there has been a visible improvement in the profitability of
the tractor industry especially during a down cycle. In the previous downcycle in FY08 and
FY09, industry margins declined to ~10% EBIT margin levels. Whilst in the previous
downcycle in FY15/FY16; EBIT margins declined only marginally to ~15% EBIT margin.
Figure 21: With industry consolidation, EBIT margins even in a downturn don’t
decline much and much higher than previous downturns
25%
20%
15%
10%
5%
0%
FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17
Figure 22: South & West are half the market for Figure 23: … but they are ~30% of Escorts' volumes
Escorts… hence providing an opportunity
West
West 24%
32% North
37%
North
East 54%
15%
East
14%
South South
17% 7%
Source: Industry data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
Figure 24: 41-50HP segment accounts for ~50% of Figure 25: Share of Escorts' stronghold North has
market up from 27% in FY12 been gradually coming down on higher penetration
100 100
6 8 10 8 5 6 7 7
11 12 13
25 30
22 32 33 33 35 33 33
80 24 23 80
23
28 27 38
49 46 46 49 14
60 60 13 12 13 13 15 14
13
19
53 51 20 19 14 13 14 19
40 50 48 19
44 46 40
44
35 37 37 35
20
20 42 40 39 40
35 36 36 34
18 18 17 17 15 15 10 11 11 11 9
0
FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 -
FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17
Source: Tractor Manufacturers Association, Credit Suisse estimates Source: Company data, Credit Suisse estimates
Figure 26: Escorts has witnessed a ~1% market share improvement across
regions but overall improvement only 30 bp as weaker regions have grown faster
25%
20%
15%
10%
5%
0%
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
North South East West Total
Extending Farmtrac The second phase which is currently in progress is filling the whitespaces in the two
towards lower different brands. Traditionally, Farmtrac has been a >45hp market and has not addressed
horsepower and 50% of the market. Since FY16, the company has been launching products to extend the
Powertrac towards Farmtrac range from 31-45hp markets. Similarly, Powertrac traditionally was a <40hp
higher horsepower brand and efforts have been made to extend the brand till 60hp. Escorts has also recently
launched 22-28hp compact tractors to address the orchard and vineyards segment
(market size of 20k p.a.) in a segment it has never addressed before.
The other focus on the product side has been on expanding the product range to 110hp
and to CRDI engines for the export markets.
Figure 27: With a series of launches since 2HFY15, Escorts has almost
completely refreshed its entire product portfolio
Two brands under Category HP Farmtrac/Powertrac Model Launch Quarter
Powertrac – Euro and Personnel Tractor 31-40 Powertrac Powertrac Euro 37 1QFY16
Alt 31-40 Powertrac Powertrac Euro 41 1QFY16
41-50 Powertrac Powertrac Euro 45 2QFY16
41-50 Powertrac Powertrac Euro 50 2QFY16
50+ Powertrac Powertrac Euro 60 3QFY17
Anti-Life Tractors (ALT) 31-40 Powertrac-ALT Powertrac ALT 3500 4QFY15
31-40 Powertrac-ALT Powertrac ALT 4000 4QFY15
Four different sub- XP Series 31-40 Farmtrac Farmtrac XP37 3QFY15
brands under Farmtrac 31-40 Farmtrac Farmtrac XP41 3QFY15
Classic Series 41-50 Farmtrac Farmtrac Classic 45 1QFY16
41-50 Farmtrac Farmtrac Classic 60 1QFY16
41-50 Farmtrac 6055 T20 Classic 3QFY17
50 HP+ Farmtrac Farmtrac 6055 Classic 3QFY16
Executive Series 50 HP+ Farmtrac Farmtrac 6050 3QFY15
50 HP+ Farmtrac Farmtrac 6050 4X4 3QFY15
50 HP+ Farmtrac Farmtrac 6055 4QFY15
50 HP+ Farmtrac 6065 Executive series 3QFY17
Heritage series 50 HP to 75 HP Farmtrac Farmtrac Heritage series 3QFY15
(6050, 6060, 6075)
Compact tractor 22-30 HP Farmtrac 22-28 HP 2QFY18
Source: Company data, Credit Suisse estimates
The company tied up with the Indian subsidiary of Rabo Bank DLL (De Lage Landen) India
to launch Escorts Credit to provide faster loans to its customers from its dealerships. This
arrangement has helped the company bring down the average approval for a loan down
from a week to less than a day.
Figure 28: Escorts is working towards increasing its market share in exports
markets; volume growth can be strong on a low base
120,000 25%
100,000
20%
80,000
15%
60,000
10%
40,000
5%
20,000
- 0%
FY18E
FY19E
FY20E
FY04-Jun
FY05-Sep
FY06-Sep
FY07-Sep
FY08-Sep
FY09-Sep
FY10-Sep
FY11-Sep
FY12-Sep
18MFY14
FY02
FY03
FY15
FY16
FY17
Figure 29: Railways segment order backlog up sharply over past couple of
years; spike in Oct-17 from a Rs1 bn order received for couplers
3,200 200%
2,800 175%
2,400 150%
2,000 125%
1,600 100%
1,200 75%
800 50%
400 25%
- 0%
Oct-17
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
3Q16
4Q16
1Q17
2Q17
3Q17
4Q17
1Q18
2Q18
While the rise in order backlog is a positive development, the new orders require the
company to import part of the equipment, which in turn implies that EBIT margins on these
orders will be lower than other orders. We are building 100 bp lower margins for the
railways business on account of this change in revenue mix. However, as indigenisation of
these products happens over the next few years, we expect that EBIT margin of the
railways segment can rise to the 16-18% level.
Railways business has reasonable barriers to entry
The railways business is a tender-based business with tenders coming from Indian
Railways and the different wagon manufacturers. It takes time for a supplier to get
approvals from the Research Designs and Standards Organisation (RDSO) under the
Ministry of Railways. The competitive intensity in this business seems relatively benign,
which is visible from the healthy operating margins and RoCE that the business has
enjoyed over the past few years. Even though railways acquires equipment on L1 (lowest
bidder) basis, the challenge for potential entrants lies in getting certified by the railways to
bid for equipment.
Recently, Escorts also got certification for the design and manufacturing of braking
systems, couplers and other railway components by International Railway Industry
Standard (IRIS). As per management, this should enable it to offer quality products to
Indian Railways at a relatively competitive price vs the currently imported equipment.
Figure 31: We build 15-18% growth p.a. in sales over Figure 32: Operating margins have improved
FY17-20E substantially since FY14 lows
4,000 50 600 25.0
3,500 40
500 20.0
3,000 30
2,500 20 400
15.0
2,000 10 300
1,500 0 10.0
200
1,000 -10
500 -20 100 5.0
- -30
- -
FY07
FY08
FY09
FY10
FY11
FY12
FY19E
FY14*
FY15
FY16
FY17
FY18E
FY20E
FY18E
FY19E
FY20E
FY14*
FY07
FY08
FY09
FY10
FY11
FY12
FY15
FY16
FY17
Railways equipment sales (Rs mn) % yoy growth (RHS) Railways equipment EBIT (Rs mn) EBIT margin (RHS)
* FY14 was 18 month period. FY07-FY12 are Sep ending. Source: Company, CS estimates * FY14 was 18 month period. FY07-FY12 are Sep ending. Source: Company, CS estimates
Figure 33: Industry has grown 16-30% over the past Figure 34: Backhoe loaders account for nearly half
two years of total volumes
80,000 50 Construction equip. FY17 indsutry volumes (~67,000 units)
70,000 40 Others
Compressors, 3%
60,000 30 Crushers
5%
50,000 20 Compactors
5%
40,000 10
Pick & carry
30,000 0
cranes
7%
20,000 -10
10,000 -20
- -30 Backhoe
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Loaders
Excavators and 46%
Construction equipment market (no.) % yoy (RHS) others
34%
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
We think volume growth for the company will likely mirror that of the industry. We are
sanguine about the industry’s growth prospects and believe that Escorts will also benefit
from pick-up in demand. The rise in volumes should help in the improvement of operating
performance, based on operating leverage. We are not very positive on the pricing power
in this industry as the competitive intensity remains high, and hence we do not expect any
significant rises in realisation.
Figure 36: Escorts operates in three segments Figure 37: Construction equipment turning around
addressing ~60% of construction equip. industry with volume growth and cost rationalisation…
FY14*
FY18E
FY19E
FY20E
FY07
FY08
FY09
FY10
FY11
FY12
FY15
FY16
FY17
60%
FY14 (18M year) number adjusted to 12M. Source: Company, CS estimates Source: Company data, Credit Suisse estimates
Figure 38: Expect strong revenue and EBIT CAGR over FY17-20E
(Rs mn) FY15 FY16 FY17 FY18E FY19E FY20E FY17-20
CAGR
Tractors vols. (incl. exports) 59,779 51,455 63,786 73,433 82,989 90,567 12.4%
Construction equip. vols. 3,007 2,555 3,315 3,978 4,575 5,261 16.6%
Revenues
Agri machinery 32,066 27,206 33,452 36,817 41,399 45,632 10.9%
Construction equipment 5,131 4,797 5,944 6,919 8,037 9,335 16.2%
Railways 1,837 2,177 2,391 2,821 3,245 3,731 16.0%
Auto 1,040 965 498 - - -
Total 40,074 35,145 42,285 46,557 52,681 58,698 11.6%
EBIT
Agri machinery 2,293 2,236 3,446 4,528 5,589 6,388 22.8%
Construction equipment (248) (284) (138) 69 201 560 Nm
Railways 175 215 307 381 422 560 22.2%
Auto (237) (165) (103) - - -
Total 1,972 1,981 3,510 4,979 6,212 7,508 28.8%
EBIT margin (%)
Agri machinery 7.2 8.2 10.3 12.3 13.5 14.0
Construction equipment (4.8) (5.9) (2.3) 1.0 2.5 6.0
Railways 9.5 9.9 12.8 13.5 13.0 15.0
Auto (22.7) (17.1) (20.7)
Source: Company data, Credit Suisse estimates
Figure 39: Healthy improvement in FCF and ROCE… Figure 40: …as capex needs are also very low
6,000 25.0 1,400
5,000 1,200
20.0
4,000 1,000
15.0
3,000 800
10.0
2,000 600
5.0 400
1,000
- - 200
-
(1,000) (5.0)
18MFY14
FY18E
FY19E
FY20E
FY09-Sep
FY10-Sep
FY11-Sep
FY12-Sep
FY15
FY16
FY17
FY18E
FY19E
FY20E
18MFY14
FY09-Sep
FY10-Sep
FY11-Sep
FY12-Sep
FY15
FY16
FY17
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
30.0
25.0 25%
25.0
20.0 20%
20.0
15.0 15%
15.0
10.0 10%
10.0
5.0 5%
5.0
- 0%
0.0
Bajaj Hero TVS Maruti M&M Eicher Escorts
Apr-05 Apr-07 Apr-09 Apr-11 Apr-13 Apr-15 Apr-17
FY19 PE (X) FY20 PE (X) FY17-20 EPS CAGR (RHS)
TVS P/E (12m forward) 10 year average
Source: Reuters, Credit Suisse estimates Source: Reuters, Credit Suisse estimates
Key risks
Key corporate governance issues in the past
Treasury stock created by the merger of subsidiary and associates
The main corporate governance concerns stem from the creation of the treasury stock post
the merger of its construction equipment business and associate investment companies
(discussed above). This resulted in an increase in voting rights for the promoters and a
dilution for minority shareholders; cancelling shares would have been ideal, in our view.
Royalty to promoters for the use of brand
The company pays a royalty of 0.5% to a promoter group company "Harparshad & Co.
Private Limited". The amount was Rs206 mn in FY17 and Rs173 mn in FY16. This is
similar to what the Tata Group companies pay to Tata Sons for the usage of the 'Tata'
brand but the 'Tata' brand has a very strong salience in the Indian market. In the case of
Escorts, we see little justification for this. However, this transaction is a part of the
numbers, and hence is already reflected. The key risk here would be if the royalty
percentage is increased, but we believe this is unlikely.
Escorts has taken some steps to address corporate governance issues
Escorts has taken a number of steps over the past few years to address corporate
governance issues. It has moved its internal audit to Grant Thornton. It has strengthened
its Board of Directors in the past few years. It has also improved capital allocation by
disposing of the unprofitable auto components business. It has increased transparency by
disclosing its monthly volume numbers like other auto companies.
Business risks
Weak tractor demand over a sustained period
The tractor industry is cyclical and witnesses weakness in demand growth once every
three to four years. This weakness is pronounced in years when monsoons are weak for
two years in a row. If monsoons were to be weaker than normal in FY19E and FY20E,
there will be risk to our demand growth estimates, especially in FY20E. Government does
come out with support schemes in such cases, and those should help offset some of the
negative impact of weak monsoons.
Competitive dynamics in the tractor industry
The current structure of the industry is such that it has a few large players (post the
consolidation seven to eight years ago), who are focused on profitability. Hence, operating
margins for the companies in the sector have remained largely steady, even during weak
demand years of FY15 and FY16. However, if some of the players become aggressive
either to gain market share (smaller ones) or to defend market share (some of the larger
ones who are losing out), there could be pricing pressure in the industry. If this scenario
were to play out, it could lead to pressure on earnings.
CFROI for Escorts Limited has been largely uninspiring as the company endured a tough
period where its diversification into Telecom and IT failed and also faced the rise in
competitive intensity in its core business. The company then embarked on a turnaround
plan in 2011, shedding its non-core and loss making businesses (auto-components,
hospitals, telecom, etc.) and invested in new products. Highlighted in Figure 44, the
turnaround efforts seemed to have borne fruit, as FY16 CFROI saw a ~100bp
improvement. The recovery is underpinned by higher margins as well as a recovery in
topline growth and asset turns. This translated into incremental improvements in economic
profits (a monetary estimate of wealth creation). In addition, the company’s leverage and
cash flow positions improved markedly as well.
Near term IBES consensus estimates suggest the turnaround would continue with high
teens topline growth and continued margins expansion. But with the stock up over 100%
over the past year, it is helpful to see if the turnaround is already priced in. Incorporating
IBES consensus estimates above, current share price implies no further margins
improvement beyond FY3/19 and topline growth to slow to 6% over the same period.
Expectations do not appear demanding against CS analyst’s expectations of a second
phase of turnaround where Escorts Ltd could potentially regain market share with new
product launches and channel expansion.
Figure 44: Escorts Ltd shedding assets and showing incremental improvements in economic profits;
deleveraged balance sheet and improving its cash flow position
CFROI Econom ic Profit
Incremental improvements
in economic profits
Shedding
(unprofitable) assets
Figure 45: Market implied scenario for Escorts Ltd—Priced for no further margins improvement and topline
growth slowing to 6% over FY3/20-22
IBES Consensus
Est.
6%
10.7%
Board of Directors
The company has also worked towards inducting people with strong professional background
as its directors, who can provide strategic inputs based on their area of expertise.
Figure 46: Board has representation from professionals across various fields
Name Category Past experience
Mr. P.H. Ravikumar Non Executive and Independent Director ICICI Bank, Bank of India, NCDEX
Mrs. Vibha Paul Rishi Non Executive and Independent Director Titan, Max India, Pepsico, Future Group
Dr. Sutanu Behuria Non Executive and Independent Director IAS officer served as Secretary in Dept of Fertilizers, Ministry of
Minority Affairs and Dept of Heavy Industry
Mr.D.J. Kakalia Non Executive and Independent Director Lawyer and Partner of Mulla & Mulla & Craige
Mr. Hardeep Singh Non Executive and Non Independent Cargill South Asia, Amalgamated Plantations (Tata Group),
Director Chairman of Monitoring committee on Minimum Support Price
Mr. G.B. Mathur Non Executive and Non Independent Strategic Advisor and Company Secy of Escorts earlier
Director
Source: Company data, Credit Suisse research
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Restricted 2%
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This research report is authored by:
Credit Suisse Securities (India) Private Limited ........................................................................................................... Jatin Chawla ; Vaibhav Jain
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