Analyst Corner: Maintain ‘buy’ on Escorts; revised FV at Rs 1,300

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Published: July 10, 2020 8:49 AM

Tractor upcycle to continue in FY2022 as well. We expect the farm equipment segment to remain robust in the near term driven by a normal monsoon (high correlation of monsoons with tractor sales), strong kharif sowing supported by increase in MSPs, surplus water reservoir levels and adequate credit availability.

Analyst Corner,Escorts, EBIT, NBFCs, kharif crops, domestic tractor demand, MSPsMaintain BUY; revised FV of Rs 1,300 (from Rs 1,000).

Tractor upcycle to continue in FY2022 as well. We expect the farm equipment segment to remain robust in the near term driven by a normal monsoon (high correlation of monsoons with tractor sales), strong kharif sowing supported by increase in MSPs, surplus water reservoir levels and adequate credit availability. Hence, we expect Escorts tractor segment (~85% of EBIT) to continue to grow as the rural economy remains resilient. Maintain BUY; revised FV of Rs 1,300 (from Rs 1,000).

The three main factors driving near-term growth prospects for tractors – progress of monsoons, financing by NBFCs and private banks and crop sowing and prices. Cumulative rainfall in India was 16% above long-term average till July 1 (14% above long-term average till July 7), which augurs well for the domestic tractor industry (refer to Exhibit 1).
As per our analysis, overall correlation of monsoons with tractor sales is quite high (~60%), barring states that have high irrigation intensity (percentage of irrigated areas across all crops in the state), which have shown lower correlation to monsoons with tractor sales (refer to Exhibits 2-4).

Also, kharif acreage was 88% higher than the same period last year till July 3 (refer to Exhibit 5). The government has also announced 2-8% yoy increase in MSPs for kharif crops, which we believe will boost farm income . As per our channel checks, NBFCs and private banks are aggressive in lending to the farm equipment segment and credit availability is not an issue (90% tractors are financed). Hence, we believe domestic tractor demand will remain robust over the next two-three years due to an improvement in rural cash flows on account of aggressive procurement of crops by the government.

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