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“BUY” This Mid Cap Auto Stock With A Target Price of Rs. 2000: HDFC Securities

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HDFC Securities Limited, one of the prominent brokerage firms of India has suggested buying the stock of Escorts Limited with a target price of Rs. 2000. The stock is currently trading at a market price of Rs. 1862 and the brokerage has set a target period of 6 months to achieve the target price which results in a gain of around 6% for the stock. Escorts Ltd. is a major engineering company in India, with a diverse product portfolio that includes agri-machinery, railway machinery, industrial, and construction equipment. The company is India's fourth-largest tractor manufacturer, having a market share of 11.6 percent in FY21.

 

Q2FY22 results of Escorts Ltd

Q2FY22 results of Escorts Ltd

According to the brokerage "Escorts reported a subdued set of numbers in Q2FY22 as irregular and uneven rainfall impacted demand for tractors. Operating income stood at Rs 1662cr, growing marginally. Agri Machinery revenues decreased 6% YoY to Rs 1241 due to a 14% YoY decline in tractor volumes offset partially by an improved realisation of 9% to Rs 5.9 lakh/unit. Construction Equipment(ECE) division revenue surged 58% YoY to Rs 249cr, as sales volume increased 31% to 1074 units. Railway Equipment Division (RED) recorded a topline of Rs 170cr vs. Rs 160cr in Q2FY21."

The brokerage in its research report has claimed that the company's "EBITDA fell 30% YoY to Rs 210cr while EBITDA margin contracted 570bps to 12.6% on account of the adverse impact of rising commodity prices, negative operating leverage, and low volumes. The company reported a PAT of Rs 177cr, a decline of 23% YoY. For the month of Oct, its exports business recorded a robust sales growth of 58% YoY to 765 units v/s 484 in Oct'21. However, in the domestic market, there was a decline of 3%. The sales volume for the domestic business for the month of October stood at 12749 v/s 13180 in Oct'21. Escorts Construction Equipment sales grew by 15.8% in Oct'21. It sold 462 machines, as against 399 machines sold in Oct/20."

Key triggers for future performance according to HDFC Securities
 

Key triggers for future performance according to HDFC Securities

The brokerage has reported that "The Board of Escorts approved a preferential allotment of 93.6 lakh shares to Japan's Kubota Corporation at Rs 2000/share for a total consideration of Rs 1873cr. This would trigger an open offer by Kubota for a 26% stake in Escorts. Assuming that the open offer is successful and the entire treasury shares (held in Escorts Benefit & Welfare trust) are cancelled Kubota would have a 53.5% stake in the company, which could further increase as it evaluates to merge its two JVs in India with Escorts. The Board also proposed to increase the limit on the maximum number of directors of the Company from 15 to 18 as it plans to have four directors nominated by Kubota (from two currently), four nominated by the promoters and eight independent directors."

HDFC Securities has also commented in its research report that "Investors looking for short-term gain can buy the stock at a current price of ~Rs 1820. The acceptance ratio of shares in the open offer can be between 60-100% vs the theoretical ratio of 51%. As per the Sep-2021 shareholding pattern, FIIs hold a 21.5% stake in the company, DII holds a 7.6%, HNIs (upto Rs 2 lakh nominal value) hold 7.2% and other retail shareholders hold 12.7% stake. We expect institutions could tender 40- 50% of their holdings and the overall acceptance ratio to be between 75-85%. Existing Promoter i.e. the Nanda Family are not selling any shares and continues to remain fully invested in the Company. Assuming that the open offer is completed in 3 months and there is full acceptance of shares, an investor can earn an annualized return of ~40%."

"We continue to remain bullish on the prospects of the company over the medium term and even if the price falls post the open offer investors need not panic and can continue to hold on to the stock given the MNC pedigree. Kubota's plan to acquire a majority stake in Escorts lends credence to its commitment to this partnership. Kubota is likely to leverage India's low-cost base in sourcing products like farm implements, construction equipment and components which could drive strong growth for Escorts in the medium to long term" said HDFC Securities.

Buy Escorts Ltd with a target price of Rs. 2000

Buy Escorts Ltd with a target price of Rs. 2000

According to the brokerage's call "The company continues to be net debt-free with sufficient available liquidity for growth. Also, the Kubota induction as a majority promoter and outlook of recovery in railway/construction space is encouraging. We expect Escorts Revenue/EBITDA/PAT to grow at 9/6/6% CAGR over FY21-FY24, led by improvement in domestic volumes and increased exports. At the current price, the stock trades at 18.6x Sep-23 EPS estimate which is not expensive given its strong medium term prospects post-Kubota becoming the majority stakeholder."

"We believe investors can buy the stock in the band of Rs 1800-1830 and add on dips to Rs 1650-1680 band (17x Sep-23E EPS) for a base case fair value of Rs 2000 (20.5x Sep-23E EPS) over the next 2 quarters. Investors can offer their shares in the open offer expected over the next few months at Rs 2000. Post the completion of the offer we expect the stock price to react downwards, but over the medium term, the open offer price may be exceeded" the brokerage claimed.

Disclaimer

Disclaimer

The stock has been picked from the brokerage report of HDFC Securities Limited. Investing in equities poses a risk of financial losses. Investors must therefore exercise due caution. Greynium Information Technologies, the author, and the brokerage house are not liable for any losses caused as a result of decisions based on the article.

Story first published: Monday, November 29, 2021, 13:02 [IST]
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