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This Multibagger Debt-Free Stock Declares Amalgamation, Sharekhan Upgrades Rating For 20% Upside

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Sharekhan, a top brokerage firm remains positive on the stock of Escorts Kubota Ltd (EKL). The company has a strong balance sheet with zero debt, strong FCF, and a decent ROCE profile of 17-22%. Stock trades at P/E of 22.7x and EV/EBITDA of 18.3x its standalone FY24E estimated projections, the brokerage firm mentioned.

 

Stock To Buy: Target Price

Stock To Buy: Target Price

The Current Market Price (CMP) of Escorts Kubota Ltd (EKL) is Rs. 2,086. Sharekhan has estimated a Target Price for the stock at around Rs. 2503. It is a large-cap stock with a market capitalization of around Rs. 27,977 crore. This stock has the potential to give 20% return, in the upcoming 1 year.

Previously the stock has given 39.17% upside in 1 year, and has given 232.54% return in last 5 years, making it a multibagger stock.

Stock Outlook 
Current Market Price (CMP)Rs. 2,086
Target PriceRs. 2503
Potential 1 year return20.00%
52 week high share priceRs. 2,144
52 week low share priceRs. 1,306.70
Financials
 

Financials

The company's net sales in FY22 was recorded at Rs. 7,143 crore, which is expected to be at Rs. 7,995 crore in FY23. Their EBITDA in FY22 stood at Rs. 1,033 crore, which is expected to be at Rs. 1,080 crore in FY23. The company's adj. net profit in FY22 was recorded at Rs. 817 crore, which is expected to be at Rs. 861 crore in FY23.

Stock Advantages: Sharekhan

Stock Advantages: Sharekhan

According to Sharekhan, "EKL is expected to discuss mid-term business plan by mid-November 2022, focusing on synergies with Kubota Corp. EKL is well-poised to gain market share in India and globally, driven by new product launches, increase in share of non-agricultural-based tractors, increase in global footprints and beneficiary of single exclusive vehicle of Kubota in India. Inclusion of estimates from the current restructuring to provide a further upside in earnings and valuations. Our initial take on estimates suggest that the restructuring of JVs would boost earnings by 15-20% going forward, aided by new revenue streams and cost optimisation."

Amalgamation

Amalgamation

Escorts Kubota Ltd (EKL) announced the amalgamation of existing JVs, viz. Kubota Agriculture India Pvt Ltd. (KAI) and Escorts Kubota India Pvt. Ltd (EKI) with EKL, for a swap ratio of 5:129 and 5:220, respectively at an acquisition valuation of 1.2x P/BV. Kubota Corporation (Japan) and EKL holds an equity stake of 60% and 40% in the JVs, KAI and EKI, respectively. KAI is a sales and marketing JV, while EKI manufactures tractors, components and spare parts. The performance of the JVs is on track and the decision to merge JVs with EKL is to simplify the organization structure. In addition, EKL announced to purchase back the rough terrain crane business from Tadano Escorts India (TEIPL) on a slump basis.

Kubota Corporation and Escorts partnership

Kubota Corporation and Escorts partnership

"We remain positive on the partnership of Kubota Corporation and erstwhile Escorts (promoted by Nanda Family) and believe these mergers to be the first step towards synergizing and integrating their respective strengths. After the second capital reduction and amalgamation scheme, Kubota Corp and Nanda Family will have 54.1% and 14% stake in EKL. Amalgamation and purchase of business of JVs to be value and earnings accretive, opening doors to newer technologies and increasing global penetration. EKL is expected to discuss its mid-term business plan by mid-November 2022, focusing on synergies with Kubota Corp. and the way forward for enhancing R&D capabilities, widening of product portfolio, creation of revenue streams and enhancing global penetration," Sharekhan stated.

Joint business plan

Joint business plan

The preferential allotment regarding partnership would infuse an equity capital of Rs. 1,872 crore in the company, the detailed business plan will be shared later. In India, Escorts and Kubota has jointly around 13% market share. With the proposed partnership, Escorts continues to focus and make efforts towards increasing its aspirational market share to 20-24% going forward. The joint business plan is expected to pan out over 6-7 years. Escorts is expected to discuss mid-term business plan by November 2022, focusing on synergies with Kubota Corp. and the way forward for enhancing R&D capabilities, widening of product portfolio, creation of new revenue streams and enhancing global penetration.

Company Portfolio:

Company Portfolio:

Escorts Ltd. is India's fourth largest tractor manufacturer having market share of about 11.3% in FY21. The company' manufacturing plant at Faridabad has the capacity to manufacture 1.20 lakh units per annum. The company makes tractors under the brands "Powertrac" and "Farmtrac". The company also exports tractors to regions such as Africa and South East Asia. Apart from tractors, the company is also engaged in the business of construction equipment (manufacturing cranes, backhoe loaders, excavators) and railways (suspension and braking systems). Tractors is the largest segment contributing about 75-80% of revenues. Construction equipment and railways contribute about 11-17% and 4-8% to the revenues respectively.

Disclaimer

Disclaimer

The above stock was picked from the brokerage report of Sharekhan. 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: Thursday, September 22, 2022, 12:13 [IST]
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