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Yes Securities Report
Escorts Kubota Ltd. Q1 FY24 results surprised positively where it exceeded our/street Ebitda/ adjusted profit after tax estimates by ~17-21%/27-33%. This is attributed to-
better than expected gross margins at 30.2% (estimate: 29.3%, +170 basis point QoQ/ +240 bp YoY),
favorable mix in railway business (led by spares and exports) led to Ebit margins at 20.9% (multi-year high) and
controlled overheads as staff cost declined ~5% QoQ (despite 7.3% QoQ increase in volumes).
The management indicated sustenance of margins (assuming stable raw material and price hike of ~1% in June 2023) with an upside potential led by ongoing cost saving programs.
We think this would not be tough but challenging given low-mid single digit volume growth expected and normalisation of product mix at railway segment.
However, we remain constructive on growth opportunities for merged entity in tractor, implements and exports. We believe, Escorts Kubota is more vulnerable versus peers as-
it derives more than 75% of its revenues from farm equipment segment segment and
aggressive expansion plans by Sonalika, TAFE, John Deere, etc. to keep tight balance between market share and margins priorities.
The valuations at 23.8 times/19.4 times FY24/25 earnings per share do reflect upon synergies post Kubota integration.
We believe, benefits arising out of Kubota joint venture to start reflecting meaningfully from FY25E.
We raise FY24/25 EPS by 10-12% to factor in sharper than expected raw material decline.
We maintain 'Neutral' on the stock with target price of Rs 2,502 (earlier Rs 2,240). We value co at 19 times March-25 EPS (versus 10 year LPA of 14.5 times) and build in revenue/Ebitda/profit after tax compound annual growth rate of 10%/40%/42% over FY23-25E.
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