Auto

India I Equities
Result Update
Change in Estimates Target Reco

26 May 2016

Escorts Rating: Buy

Target Price: `213
Expectation of significant recovery due to a better monsoon; Buy Share Price: `173
Because of the good monsoon expected and the consequent better Key data ESC IN / ESCO.BO
52-week high / low `189 / `101
rural economy, we expect higher volume growth in tractors. Hence, we Sensex / Nifty 26367 / 8070
maintain a Buy on Escorts. Its thrust on dealer expansion and 3-m average volume $2.5m
operations in southern India would add to its growth prospects. We Market cap `21bn/$316.5m
expect CAGRs in revenue, EBITDA and PAT over FY16-18 of Shares outstanding 123m
respectively 13%, 45% and 74%.
Shareholding pattern (%) Mar'16 Dec'15 Sep'15
Favourable macro factors. The favourable forecasts of a good monsoon Promoters 43.0 43.0 43.0
after two years of poor rains, the government's focus on farm mechanization, - of which, Pledged - - -
the shortage of inexpensive farm labour and the lower farm penetration levels Free Float 57.0 57.0 57.0
are some of the key drivers for tractors. Escorts is poised to benefit from this. - Foreign Institutions 8.3 8.5 8.3
- Domestic Institutions 3.5 3.8 3.4
Domestic industry growth guidance of 10-12%. Management has guided - Public 45.2 44.8 45.3
to 10%-12% growth in the domestic tractor sector in FY17. The South would
be the major contributor to this. Though Escorts market share at present in Estimates revision (%) FY17e FY18e
this region is only 4-5%, its enhanced thrust on dealer development in this Sales 3.7 7.4
region would add to its overall tally. EBITDA -3.7 0.4
PAT 6.4 6.3
Q4 FY16 result analysis. Revenue at `8bn (in line with our `7.9bn estimate)
came slightly down, by 1.6% yoy. Overall volume growth in the quarter was
Financials (YE: Mar) FY17e FY18e
7% yoy. Realisations were down 6% yoy due to the change in accounting
Sales (` m) 39,870 45,513
policy. (The company now writes off discounts in net sales.) Soft commodity
Net profit (` m) 1,513 2,359
prices and Escorts focus on cost reduction have helped its EBITDA margin
EPS (`) 12.7 19.8
expand ~200bps yoy to 4.8%. On adjustment of an exceptional expense of
``131m, profit shot up 134% to `296m. Growth (%) 65.0 56.0
PE (x) 13.6 8.7
Valuation. Considering the optimistic monsoon forecasts, we build in 12% PBV (x) 1.0 0.9
volume growth in tractor volumes for FY17 and FY18, and accordingly a RoE (%) 7.8 11.3
13% CAGR in revenue over FY16-8. We maintain a Buy, and increase our RoCE (%) 9.7 13.1
target multiple from 9x FY18e to 11x FY18e and arrive at a price target of Dividend yield (%) 1.3 2.0
`213 (earlier `164). Risks. Poor/delayed monsoon. Net debt / equity (x) 0.0 -0.0
Source: Anand Rathi Research

Quarterly results (YE: Sep) 4QFY15 4QFY16 % yoy/bps FY15 FY16 % yoy
Sales (`m) 8,177 8,047 -1.6 41,127 35,376 -14.0
EBITDA (`m) 220 388 76.2 1,606 1,465 -8.8
EBITDA margin (%) 2.7 4.8 213bps 3.9 4.1 24bps
Interest (`m) 159 152 -4.6 583 524 -10.1
Depreciation (`m) 212 137 -35.5 686 612 -10.9
Other income(`m) 254 187 -26.2 674 606 -10.1 Mayur Milak
PBT (`m) 103 287 179.1 1,010 935 -7.5 Research Analyst
Tax (`m) -24 -9 -62.4 -56 22 139.7
Adjusted PAT (`m) 126 296 134.0 1,066 913 -14.4
Reported PAT 128 164 28.7 763 771 1.1
Source: Company

Anand Rathi Share and Stock Brokers Limited (hereinafter ARSSBL) is a full-service brokerage and equities-research firm and the views expressed therein are solely of
ARSSBL and not of the companies which have been covered in the Research Report. This report is intended for the sole use of the Recipient. Disclosures and analyst
certifications are present in the Appendix.

AnandRathi Research India Equities

26 May 2016 Escorts - Disappointing Q3; estimates cut, limited downside expected; Buy

Quick Glance Financials and Valuations

Fig 1 Income statement (` m) Fig 2 Balance sheet (` m)
Year-end: Mar FY14 FY15e FY16e FY17e FY18e Year-end: Mar FY14 FY15e FY16e FY17e FY18e
Net revenues 64,990 41,127 35,376 39,870 45,513 Share capital 1,193 1,193 1,193 1,193 1,193
Revenue growth (%) 60.6 -36.7 -14.0 12.7 14.2 Reserves & surplus 17,463 17,113 17,708 18,854 20,665
- Oper. expenses 61,121 39,521 33,911 37,664 42,404 Net worth 18,655 18,306 18,901 20,047 21,858
EBIDTA 3,870 1,606 1,465 2,206 3,109 Total debt 4,383 4,115 3,075 2,975 2,575
EBITDA margins (%) 6.0 3.9 4.1 5.5 6.8 Minority interest 178 147 127 127 127
- Interest 1,122 583 524 484 444 Def. tax liab. (net) -135 -543 -461 -461 -461
- Depreciation 860 686 612 633 652 Capital employed 23,081 22,025 21,642 22,688 24,099
+ Other income 829 674 606 586 603 Net fixed assets 16,727 16,513 16,359 16,518 16,716
- Tax 282 -56 22 163 257 Intangible assets 197 - - - -
Effective tax rate (%) 10.4 (5.5) 2.4 9.7 9.8 Investments 3,720 3,726 3,708 4,108 4,508
+ Associates / (minorities) -2 3 4 - - - of which, Liquid - - - - -
Adjusted PAT 2,432 1,069 917 1,513 2,359 Working capital -269 -728 -877 -478 -736
+ Extraordinary items 35 -306 -145 -50 -50 Cash 2,706 2,514 2,451 2,541 3,611
Reported PAT 2,467 763 771 1,463 2,309 Capital deployed 23,081 22,025 21,642 22,688 24,099
Adj. FDEPS (` / sh) 20.4 9.0 7.7 12.7 19.8 W C turn (days) (2) (6) (9) (4) (6)
Adj. FDEPS growth (%) 235.5 -56.0 -14.3 65.0 56.0 Book value (` / sh) 156 153 158 168 183
Source: Company, Anand Rathi Research Source: Company, Anand Rathi Research

Fig 3 Cash-flow statement (`m) Fig 4 Ratio analysis @ `173

Year-end: Mar FY14 FY15 FY16e FY17e FY18e Year-end:Mar FY14 FY15 FY16e FY17e FY18e
Adjusted PAT 2,432 1,069 917 1,513 2,359 P/E (x) 8.5 19.3 22.5 13.6 8.7
+ Non-cash items 860 686 612 633 652 Cash P/E (x) 6.3 11.8 13.5 9.6 6.9
Cash profit 3,292 1,756 1,528 2,145 3,011 EV / EBITDA (x) 5.8 13.9 14.5 9.6 6.3
- Incr. / (decr.) in WC -570 -458 -149 398 -258 EV / sales (x) 0.3 0.5 0.6 0.5 0.4
Operating cash-flow 3,862 2,214 1,677 1,747 3,269 P/B (x) 1.1 1.1 1.1 1.0 0.9
- Capex 1,168 275 458 792 850 RoE (%) 13.9 5.8 4.9 7.8 11.3
Free-cash-flow 2,695 1,939 1,219 955 2,419 RoCE (%) 17.0 7.1 6.7 9.7 13.1
- Dividend 258 177 177 316 499 Dividend yield (%) 1.1 0.7 0.7 1.3 2.0
+ Equity raised 55 -966 -20 -0 -0 Dividend payout (%) 10.6 16.6 19.3 20.9 21.1
+ Debt raised -1,281 -676 -958 -100 -400 Net debt / equity (x) 0.1 0.1 0.0 0.0 -0.0
- Investments -9 6 -18 400 400 Debtor days 21 37 42 40 38
- Misc. items -35 306 145 50 50 Inventory days 33 40 44 42 40
Net cash-flow 1,254 -192 -62 89 1,071 Payables days 35 66 77 65 61
+ Op. cash & bank bal. 1,452 2,706 2,514 2,451 2,541 D/E ratio 0.2 0.2 0.2 0.1 0.1
Cl. Cash & bank bal. 2,706 2,514 2,451 2,541 3,611 Interest coverage ratio 3.1 3.0 2.7 4.0 6.2
Source: Company, Anand Rathi Research Source: Company, Anand Rathi Research

Fig 5 PE Chart Fig 6 Price movement

500 (`)
450 200
400
ESC

350 170

300 23x
140
250
17x
200
110
150 11x
100 80
50 5x

0 50
Jul-13

Jul-14

Jul-15
Sep-13
Nov-13

Sep-14
Nov-14

Sep-15
Nov-15
May-13

Jan-14

May-14

Jan-15

May-15

Jan-16

May-16
Mar-14

Mar-15

Mar-16
Nov-11

May-12

Nov-12

May-13

Nov-13

May-14

Nov-14

May-15

Nov-15

May-16

Source: Bloomberg, Anand Rathi Research Source: Bloomberg

AnandRathi Research 2
26 May 2016 Escorts - Disappointing Q3; estimates cut, limited downside expected; Buy

Result Highlights
The top-line came in line with our estimates, down a slight 1.6% yoy, at
`8bn. Export volumes for the quarter declined 35% yoy, but domestic
volumes grew a decent 8.4%, leading to overall 7% yoy volume growth to
11,823 units. Average realisations shrunk 6% due to the change in
accounting policy. The company now reports revenues net of discounts.
Revenue from all the segments, except agri-machinery, improved from Q3
FY16. Revenue from the agri-machinery division declined 13.2% qoq,
though its margins improved to 9.7%, against 6.8% the prior quarter.
Revenues from auto-ancillaries, railway equipment and construction
equipment increased respectively 41.4%, 3.6%, and 2.3%.
Escorts focus on improving margins through cost reduction and
improving its product mix is evident from the expansion of its EBITDA
margin from 2.7% in Q4 FY15 to 4.8% a year later. It came 40bps higher
than our estimated 4.4%.
The EBITDA expansion along with the drop in interest expense led to
adjusted profit increasing 134% to `296m. There was a one-time, `131m,
hit in the quarter, which brought the reported profit down to `164m. This
was on account of pending litigation from 2006-07.

Fig 7 Quarterly performance

` m (Y/E: Mar) Q4 FY15 Q1 FY16 Q2 FY16 Q3 FY16 Q4 FY16
VOLUMES
Tractors 11,036 14,875 11,438 13,319 11,823
YoY (%) (29.1) (16.7) (23.8) (16.1) 7.1
Net sales 8,177 9,777 8,017 8,881 8,047
YoY (%) (16.8) (13.4) (19.2) (15.1) (1.6)
QoQ (%) (21.9) 19.6 (18.0) 10.8 (9.4)
Other income 254 112 148 131 187
TOTAL INCOME 8,431 9,889 8,164 9,012 8,235
EXPENDITURE
(Incr.) / decr. in stock-in-trade 183 329 (941) 846 (288)
Materials 5,613 6,421 6,393 5,303 5,876
% of sales 70.9 69.0 68.0 69.2 69.4
YoY (%) (18.1) (17.1) (22.8) (17.8) (3.6)
QoQ (%) (22.6) 16.5 (19.2) 12.8 (9.1)
Staff cost 951 1,083 1,060 1,090 973
% of sales 11.6 11.1 13.2 12.3 12.1
Other expenditure 1,211 1,368 1,209 1,300 1,099
% of sales 14.8 14.0 15.1 14.6 13.7
Total expenses 7,957 9,202 7,721 8,540 7,659
EBITDA 220 575 295 341 388
YoY (%) (51.9) 1.1 (11.9) (30.3) 76.2
QoQ (%) (55.0) 161.0 (48.6) 15.6 13.7
OPM (%) 2.7 5.9 3.7 3.8 4.8
Interest 159 137 111 112 152
Depreciation 212 161 155 149 137
Exceptional items 1 -5 -9 1 -131
Profit before tax 104 383 168 212 155
Provision for taxation (24) 21 6 7 (9)
Tax Rate (%) (22.6) 5.4 3.5 3.4 (5.7)
PAT 128 362 162 205 164
EPS 1.1 3.0 1.4 1.7 1.4
Source: Company

AnandRathi Research 3
26 May 2016 Escorts - Disappointing Q3; estimates cut, limited downside expected; Buy

Fig 8 Segmental performance

Q4 FY15 Q1 FY16 Q2 FY16 Q3 FY16 Q4 FY16
Segment revenue
Agri-machine products 6,094 8,122 6,097 7,072 6,137
YoY (%) (24.0) (14.2) (24.1) (16.6) 0.7
Auto ancillary products 288 290 242 165 234
YoY (%) (5.9) 26.3 (9.6) (35.2) (18.7)
Railway equipment 545 488 535 508 526
YoY (%) 20.8 14.2 13.1 29.8 (3.6)
Unallocable 4 12 25 4 2
Construction equipment 1,293 934 1,245 1,189 1,216
Others 4 -
Total 8,224 9,850 8,146 8,938 8,115
Less: Inter-segment revenue 47 42 58 57 68
Net sales 8,177 9,808 8,088 8,881 8,047

Segment results
Agri-machine products 282 735 411 483 593
Margin (%) 4.6 9.0 6.7 6.8 9.7
Auto-ancillary products (27) (43) (47) (60) (16)
Margin (%) (9.4) (14.8) (19.2) (36.4) (7.0)
Railway equipment 105 63 80 63 20
Margin (%) 19.2 12.9 14.9 12.4 3.8
Construction equipment (34) (112) (49) (71) (69)
Others (3) 2 (3) (3) (3)
Total 323 645 392 412 525
Less:
Interest charges 159 137 111 112 152
Exceptional items (1) 5 9 (1) 131
Other non-allocable expenses 61 119 104 89 86
PBT 104 383 168 212 155

Capital employed
Agricultural-machine products 10,730 9,731 11,218 11,154 10,580
Auto-ancillary products 514 517 520 529 591
Railway equipment 1,236 908 902 917 1,044
Construction equipment 1,748 1,626 1,608 1,474 1,305
Others 52 56 56 56 56
Unallocable 9,974 9,847 10,076 10,264 9,328
24,254 22,685 24,380 24,394 22,905
Source: Company

AnandRathi Research 4
26 May 2016 Escorts - Disappointing Q3; estimates cut, limited downside expected; Buy

Estimate revisions and valuation

Change in estimates
Considering the optimistic monsoon forecast, we raise our FY17e and
FY18e revenue respectively 4% and 7%.
We build in 12% tractor volume growth for FY17 and FY18 and,
accordingly, a 13% revenue CAGR over FY16-18.

Under a VRS started in FY15, 350 employees were made to voluntarily

retire. The plan was to retire 1,000 employees over three years.
During FY16, however, the union blocked the implementation of the
VRS. Therefore, we revise our estimates for staff costs.
Considering the optimistic monsoon forecasts, and implied benefit to the
rural economy, we maintain a Buy and raise our target multiple from 9x
FY18e to 11x FY18e, and arrive at a price target of `213.

Fig 9 Change in estimates

Original Estimates Revised Estimates Change (%)
`m
FY17e FY18e FY17e FY18e FY17e FY18e

Revenue 38,456 42,363 39,870 45,513 3.7% 7.4%

EBITDA 2,291 3,097 2,206 3,109 -3.7% 0.4%
PAT 1,375 2,172 1,463 2,309 6.4% 6.3%
Source: Anand Rathi Research

Risks
Poor monsoon.

AnandRathi Research 5
Appendix
Analyst Certification
The views expressed in this Research Report accurately reflect the personal views of the analyst(s) about the subject securities or issuers and no part of the
compensation of the research analyst(s) was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research
analyst(s) in this report. The research analysts are bound by stringent internal regulations and also legal and statutory requirements of the Securities and Exchange
Board of India (hereinafter SEBI) and the analysts compensation are completely delinked from all the other companies and/or entities of Anand Rathi, and have
no bearing whatsoever on any recommendation that they have given in the Research Report.

Important Disclosures on subject companies

Rating and Target Price History (as of 26 May 2016)
190 TP Share
Escorts Date Rating (`) Price (`)
180 1 11-Sep-15 Buy 210 156
170 2 05-Feb-16 Buy 164 123
160
150
1
140 2
130
120
110
100
Jan-15

Feb-15

Mar-15

Apr-15

May-15

Jun-15

Jul-15

Mar-16
Aug-15

Sep-15

Oct-15

Nov-15

Dec-15

Jan-16

Feb-16

Apr-16

May-16
Anand Rathi Ratings Definitions
Analysts ratings and the corresponding expected returns take into account our definitions of Large Caps (>US$1bn) and Mid/Small Caps (<US$1bn) as described
in the Ratings Table below:
Ratings Guide
Buy Hold Sell
Large Caps (>US$1bn) >15% 5-15% <5%
Mid/Small Caps (<US$1bn) >25% 5-25% <5%

Anand Rathi Research Ratings Distribution (as of 26 May 2016)

Buy Hold Sell
Anand Rathi Research stock coverage (196) 60% 27% 13%
% who are investment banking clients 4% 0% 0%

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