Escorts Kubota Scrip Gets Sell Rating, Has Significant Potential Downside

BOB Capital Markets has given a sell rating to Escorts Kubota Ltd, an auto engineering mid-cap company, stocks. The brokerage firm feels that the share price of this auto engineering company will fall by roughly 14.89% and reach Rs 1,742 per share.

Q4FY23 performance

Escorts Kubota posted a revenue growth of 17% YoY to Rs 21.8 billion in Q4FY23 as volumes increased 13% YoY while it declined sequentially. The company posted a sequential revenue decline of 4% as volumes dropped 12% QoQ due to weak sales in March amid unseasonal rains and crop damage, as per the BOB research report.

Net realisation per vehicle (NRPV) in the tractor segment grew 1% YoY (+3% QoQ) to Rs 0.63 million on the back of price increases (1.5-2%) taken by the company at the end of Q3FY23.

According to BOB Capital Markets, raw material costs spiked by 19% YoY to Rs 15.6 billion due to commodity price inflation while improving 7% QoQ as prices softened.

Gross margin at 28.5% fell 140bps YoY but expanded 300bps QoQ. The reported profit after tax (PAT) was down 8% YoY (-1% QoQ) to Rs 1.8 billion due to impairment provisions, excluding which growth was at 4% YoY (+13% QoQ).

Management outlook

The BOB report stated that the management is targeting a 14-15% EBITDA margin by FY24-end. However, commodity softening will be the key to achieving this objective, apart from benefits flowing from cost initiatives and a better product mix.

Valuation and Rating

BOB Capital Markets revised its estimates for FY24/FY25 EPS by -4%/+3% to Rs 67/Rs 84 to factor in a marginal growth slowdown for Escorts in the shorter term, and also roll valuations over to FY25E. "Our target price thus moves to Rs 1,749 (earlier Rs 1,742), wherein we continue to value the core business at 20x EPS."

The brokerage firm explains the reasons for suggesting investors sell the shares. "As the current valuations of 24.5x FY25E EPS appear unjustified given our expectations of slow margin expansion, stiff competition in the tractor business, and Escorts' narrow focus on the compact tractor segment. The merger with global partner Kubota Corp has been delayed, adding further uncertainty. Maintain SELL."

Dividend details

The Escorts Kubota directors, in the board meeting held on May 10, recommended a final dividend of Rs 7 (70%) per fully paid-up equity share of Rs 10 each for the financial year 2022-23. It is subject to the approval of members at the ensuing annual general meeting . No record date or book closure details were shared by the company.

Share price movement

The latest stock price of Escorts Kubota is Rs 2,044.85 per share, which is marginally down 0.69% on an intraday basis, at the time of writing this note. In the last year, the share price has surged by 24.06% per cent, and in the last three years, the price has zoomed by 148.15%.

Disclaimer

The stocks have been picked from the brokerage report of BOB Capital Markets. Greynium Information Technologies, the author and the brokerage firm are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to consult with certified experts before making any investment decision.