ICICI Direct Upgrades This Multibagger Mid Cap Auto Stock From Hold To Buy, Shares Can Surge 24%

ICICI Direct in its report on Escorts Kubota Ltd. has given a buy call to the stock of the company for a target price of Rs 2,390 apiece. According to the brokerage's target price, the stock has a huge potential of 24% upside in 12 months. It is a mid-cap auto sector company with a market capitalization of Rs 25,463.22 crore.

The company is a prominent tractor maker domestically (10.3% FY22 market share). It also serves domestic construction equipment, railways space. FY22 sales mix - tractors 77%, construction equipment 14%, railways 9%. Past five year CAGR: 24.1%, 35.6% in EBITDA, PAT; cash positive b/s.

Stock Outlook

The current market price of the stock is Rs 1,929.90 apiece on NSE. The stock's 52-week low is Rs 1,306.70 recorded on 30 June 2022, and the 52-week high is Rs 2,089.35 apiece recorded on 2 September 2022, respectively.

Returns on investment

The stock in the past 1 week slid down 2.72%. Whereas, in the past 1 and 3 months, it gave a positive return of 4.74% and 23.73%, respectively. Over the past 1 year, the stock has given 33.29% positive return. In the past 3 & 5 years, it gave multibagger returns of 260.09% and 188.67%, respectively.

Key Highlights

Escorts Kubota passed a resolution to amalgamate Escorts Kubota India Pvt Ltd (EKI, JV between Escorts & Kubota in 40:60 ratio, tractor manufacturing entity) & Kubota Agriculture Machinery Pvt Ltd (KAI, JV between Escorts & Kubota in 40:60 ratio, including all farm machinery presence of Kubota in India) into Escorts Kubota Ltd for swap ratio of 5:129 & 5:220, respectively.

In FY22, EKI & KAI had revenue of Rs 689 crore & Rs 1820 crore, respectively. EKI incurred a loss of Rs 96 crore while KAI generated profit of Rs 53 crore.

This comes in line with the earlier announcement made at the time of Kubota acquiring a further stake in the company and joining as co-promoter. It is aimed at simplifying the group structure with listed entity now including Kubota's complete presence in India

According to the brokerage, "Swap ratio & consequent value assigned to the residual stake is fair in our opinion thereby protecting the interest of minority shareholders."

The stakes are being acquired at ~1.2x P/B with effective cost of acquisition pegged at ~Rs 276 crore (i.e. 13.8 lakh shares multiplied by CMP of 2,000).

Structure simplified, merged entity well placed to grow, Buy - Target Price Rs, 2,390

The stock price has grown at ~26% CAGR over last five years from ~Rs 636 in September 2017, vastly outperforming the Nifty Auto Index. "We upgrade the stock from HOLD to BUY tracking Kubota's strength in farm machinery space with key monitorable being medium term growth plan. We await b/s of merged entity before incorporating the same in our financials. Keeping the standalone financials intact (erstwhile Escorts) & assuming to be merged entities operating unchanged, we value EscortsKubota on SOTP basis at Rs 2,390; valuing it at 25x PE on combined PAT in FY24," the brokerage has said.

Key triggers for future price performance

According to the brokerage firm, the key triggers for future price performance are as follows:

• Formal plan on scaling up operations of the company and leveraging channels using expertise of new co-promoter Kubota.
• We expect sales to grow at CAGR of 11% over FY22-24E, with consequent margins expected at 12.5% by FY24E.
• RoIC profile of ~30% (RoCE is suppressed due to high cash on b/s).

Disclaimer

The stock has been picked from the brokerage report of ICICI Direct. Greynium Information Technologies, the Author, and the respective Brokerage House are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to check with certified experts before making any investment decision.