Strong growth in non-agri (commercial) usage of tractors should further help. Escorts expects to grow better than the industry both during the festivals and FY22 as a whole.
We hosted Mr Shenu Agarwal, President of Agri and Construction Equipment at Escorts, on 14 September 2021. The company reiterated its expectation of low- to mid-single-digit growth for the industry in FY22. Sentiment has improved in recent weeks with the revival of monsoon and onset of smaller festivals (like Ganesh festival). Strong growth in non-agri (commercial) usage of tractors should further help. Escorts expects to grow better than the industry both during the festivals and FY22 as a whole.
Demand upcycle may be sustained: The strong base from the previous year has been a key growth concern for the market. However, as per management, improvement in reservoir levels and retail financing could help the industry deliver growth in FY23 as well (as compared with our estimate of a mid-single-digit decline). With industry penetration far from saturation and most demand drivers still in place, the current upcycle could be sustained in the medium term as per management.
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Long-term industry drivers remain intact: The domestic tractor industry remains underpenetrated as discussed in our recent note ‘Tractor load of value and investor apathy – II of 31 August 2021’. References from states with relatively high penetration (like Punjab and Haryana) suggest that there is significant long-term potential for other states to catch up. Long-term industry growth should be supported by 1) rise in penetration levels in the addressable c20m land holdings (>2Ha) from c30% currently to c60-70% as affordability improves; 2) increased access to marginal farmers (<2Ha land holdings) through innovative rental models; and 3) the rise in average Hp (Horse power) per acreage, which is among the lowest compared with other large agri- economies. As per Escorts, the tractor population has the potential to double from c7m units currently before saturation.
Exports is a significant focus for Escorts: We remain positive on the long-term growth potential for exports (factoring in a 25% volume CAGR over FY21-24e), partly helped by its partnership with Kubota. While exports now account for only 5% of overall tractor sales, the R&D effort in terms of product development is disproportionately high.
The company targets to soon roll out multiple new products and to leverage the network and experience of Kubota.
Retain ‘buy’ and target price of Rs 1,580: Recovery in demand in core markets could help improve market share for Escorts in FY22. The long-term story looks intact with its focus on product development, diversifying revenues and improving reach.