Brokerage firm ICICI Direct has suggested buying the stock of Escorts for a price target of Rs. 2200 for a 12 month period. This means potential investors in the stock can gain return of 22 percent if they invest at the current market price of 1802.85.
Below is stated what all brokerage considers to be key with respect to the stock of Escorts:
Escorts is the country's fourth largest tractor manufacturing entity with a market share of 11.3 percent. The company also caters to the domestic railways and construction equipment segment. Talking about its sales mix in FY21, tractors account for the major sales component.
Kubota Escorts transaction:
The company will issue additional equity through the preferential allotment route to the Japanese tractor major Kubota Corporation for a price of Rs. 2000 per share with inflow of approximately Rs. 1873 crore.
In the transaction, Kubota's shareholding in Escorts shall increase to 16.4 percent from 10 percent and the company will become a joint promoter of Escorts.
There is a proposal to change company name to Escorts Kubota Ltd.
All the current JV's are planned to be merged.
Nanda family will retain its stake and Mr. Nikhil Nanda will continue to be the CMD.
Brokerage's advice on Escorts to investors
The scrip in the past 5 years has zoomed 6 times from levels of around Rs. 300 in November 2016, significantly outperforming Nifty Auto index. "We retain B U Y on Escorts with Kubota now a co-promoter with expectations of enhanced product offerings and increased global sourcing from India", says the brokerage.
Target Price and Valuation: The brokerage values Escorts at revised SOTP-based TP of Rs. 2,200 (23x P/E on core FY23E EPS, 15% discount on treasury shares; previous TP- Rs. 1,900 )
Key triggers for future price performance:
• New product launches in the farm mechanisation side (ex-tractors).
• Optimum utilisation of surplus cash on b/s, currently nearly at Rs. 5,000 crore.
• Expect 13% tractor revenue CAGR over FY21-23E.
• Construction equipment, railways growth to be faster amid expected pickup in economic activity and positive outlook for user segments
Alternate Stock Idea:
Other than Escorts, the brokerage house in its auto OEM coverage is bullish on M&M. The company recommends buying the stock of M&M for a target price of Rs. 1125, potential upside of 21.75% from the last traded price of Rs. 923.7 per share. The brokerage highlights positives of M&M as prudent capital allocation, UV differentiation & EV proactiveness.
The above stock was picked from the brokerage report of ICICI Direct. 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.