HSBC Initiates New Buy On Escorts On Recovery From Years Of Rough Patch

Escorts Ltd. has been able to detach itself from years of sluggish performance on the back of brand improvement and corporate performance bringing it back to a path of recovery, according to an HSBC Global Research report.

The global research firm initiated coverage on the tractor maker with a 'Buy' rating and a target price of Rs 835. This implies a potential upside of 21 percent from the current levels.

Escorts' share in domestic tractor market fell by over three percent to 10.3 percent in financial year 2016 due to investment gaps and a weak product portfolio. In fact the difficult years mentioned by HSBC in their report actually constitute a contraction in the tractor market.

Read more here on November's auto sales.

The tractor segment revived this year due to better monsoons, farm mechanisation and betterment in farmers' income. Tractor volumes will rise at a compound annual growth rate of 10 percent over financial years 2017 to 2020, the report added.

The market share, too, saw an uptick because of new products, improved dealership strategies, more focus on higher margin exports and after-sales service. HSBC now expects the market share to go up to 12 percent by financial year 2020.

HSBC also expects improvement in a range of financials of the company. While earnings before interest and tax is expected to rise 33 percent over three fiscals up to March 2020, profit after tax's expected CAGR will be around 45 percent for the same period. The company is expected to clock 20 percent returns on capital employed by March 2020.

The global research firm attributes this series of improvements to:

• cost cutting
• better product mix
• increased capacity utilisation

Along with weak monsoon, failing cost initiatives and disappointing exports pose downside risks for the company.

Read why Credit Suisse Initiated Coverage On Escorts.