15th April 2011

Fundamental Pick Initial Coverage

Rating : Buy
Target Price : `167 Upside :20% Time Frame: 15-18 month CMP : `139 (as on 13/04/11)
Key Share Data
NSE Symbol BSE Code/Group Bloomberg Code Reuters Code Equity Capital (` Cr) Face value Market Cap. (` Cr) 52W H/L (SENSEX) Avg. Daily Volume Sector Sensex Nifty ESCORTS 500495/B ESC IN ESCO.BO 105.93 ` 10 1460.55 94.10/245.95 215223 Automobile 19696 5911

Escorts Limited

Escorts, one of Indias leading engineering conglomerates, focuses on fast growing agri machinery, construction equipment and railway equipment segments, with leading positions in most subsegments in which it operates. Today Escorts is Indias 3rd largest tractor manufacturer, largest mobile crane manufactures and 2nd largest slew crane player. This shows the leading position of the company. With renewed focus on core businesses and newly appointed professional management, we expect the company to be key beneficiary of growth potential in Indias rural and infrastructure economies. We initiate coverage on the stock with 'BUY' rating with a price target of `167.

INVESTMENT COGENCY:
T RACTOR
DEMAND TO EXCEL.

Main factors that boosts up tractor demand is government rural development scheme such as: Increase in Minimum Support Price Interest subvention Agri Credit Scheme Apart from government policies, Monsoon also plays an important role in the truck demand. For the coming year good monsoon is expected which will translate in to high tractor sales . Another important factor that help the growth in the tractor sales is different usage of tractor apart from farming activity such as transportation and hauling. Company is customizing tractor according to the requirement of the southern region and also working towards increasing the point-of-presence in the Southern region to increase the market share in South India Companys expansion in Africa and increasing its foot print geographically gives the company a competitive edge by building its brand Globally Company is in the continuous process of upgrading its technology and increase the utilization level to increase its operating margin.
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Share Holding Pattern

Promoter FII DII Public & Others 26.77% 30.38% 16.78% 26.07%

Stock Returns in (%)

1Mth ESCORTS NIFTY
150 125 100 75 50

3Mth -1.06

6Mth -4.28

6.73 5.82

-11.45 -38.81

ESCORTS

SENSEX

Research Analyst Dipti Saraf dipti.saraf@monarchproject.com # +91 79 26666717

Escorts Limited

H IGH G ROWTH
NESS

POTENTIAL IN

E QUIPMENT C ONSTRUCTION B USI-

Escorts Construction Equipment Ltd (ECEL) is a wholly owned subsidiary of Escorts. It is basically engaged in manufacturing and selling construction equipments like Pick N Carry cranes, Slew cranes, Crawler Cranes, forklifts and loaders. It has collaborations with various global players whose products are marketed by Escorts in India. Today ECIL is the largest mobile crane manufactures and 2nd largest slew crane player. Government.s focus towards the improvement of the Indian Infrastructure will help the company to grow. Infrastructure spending has been increased by 122% from 11th plan to 12th 5-year plan. Total spending of the 12th plan is expected to be Rs. 45630 bn. Nonetheless governments focus in the modernization and expansion of the Indian Railway will give the company high potential. H EALTHY F INANCIAL
AND

V ALUATION

We expect the revenue and profit of Escorts to grow at 19% and 21% CAGR to `4,777 and `192 Crs during 2010 to 2012E period respectively. At the CMP of `139 the company is trading at multiples of 10.21X and 6.65X of its FY2011E and FY2012E EPS of `13.61 and `20.89 respectively. We initiate coverage on Escorts with a BUY rating with a price target of `167 in 15-18 month. Historically the company is trading between P/E band of 9-15 , we conservatively take the multiple of 8 with its FY2012E EPS of `20.89

FY09 Revenue (` crs) YoY EBITDA (` crs) Growth EBITDA (%) PAT (` crs) Growth PAT (%) DEPS (`) EPS BV (`) ROE (%) ROCE (%) 2649.63 -3.7% 157.74 419.6% 6.0% 28.60 176.1% 1.1% 9.89 3.55 176.99 2.01 5.34

FY10 3394.54 28.1% 190.88 21.0% 5.6% 132.31 362.6% 3.9% 13.45 15.49 183.04 7.85 6.57

FY11E 4020.36 18.4% 179.96 -5.7% 4.5% 125.34 -5.3% 3.1% 18.06 13.61 194.60 6.99 5.75

FY12E 4777.46 18.8% 255.61 42.0% 5.4% 192.41 53.5% 4.0% 20.25 20.89 213.38 9.79 8.30

FY13E 4988.46 4.4% 325.06 27.2% 6.5% 258.59 34.4% 5.2% 21.53 28.07 239.35 11.73 10.42
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Escorts Limited

About the Company

Escorts was incorporated in 1944 with the name of Escorts Agent Ltd. It was started as a small agency house by Mr. H.P. Nanda & Mr. Yudi Nanda. Over the years company has evolved it self as one of India's largest Engineering conglomerates operating in the high growth sectors of agri-machinery, construction & material handling equipment, railway equipment and auto components.
Company Background

Escorts

Business

Agri Machinery Group (AMG)

Railway Equipment Division

Auto Suspension Parts (ASP)

Escorts Equipment Construction Ltd (ECEL)

Product Range
AMG

Tractors (25-85 HP), Harrow, Ploughs, Tillers, Bailers, rotavators.

Brake Systems, Couplers, Shock Absorbers, Rail Fastening Systems.

Shock Absorbers. Front forks, leg assemblies, clutch plate, engine oil

Cranes, Loaders, vibratory rollers, Forklifts

Source: Monarch Research

Escorts is one of the leading tractor manufactures with nearly 14% market share. Escorts has pioneered farm mechanization in the country, and played a pivotal role in the agricultural growth of India for over five decades. Escorts caters comprehensive range of tractors with more than 45 variants starting from 25 to 80 HP.
% of Volume 48 50 2 HP Range 34-55 34-75 25-35 Price Range (Rs. Lac) 2.9-4.7 3.2-5.5 2.6-3.0 Comments Utility Tractor Premium Tractor Economy tractor

Exhibit 1: Brands of Escorts Tractor

Brand Powertrac Farmtrac Escorts

Source: Company, Monarch Research

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Escorts Limited

Business Segment of the company ECEL

Escorts has developed itself as a leading material handling and construction equipment manufacturer. It is basically engaged in manufacturing and marketing diverse range of equipment like cranes, loaders, vibratory rollers and forklifts. Escorts today is the world's largest Pick 'n' Carry Hydraulic Mobile Crane manufacturer.
Industry Size (units) Market Share (%) Peers 5000-6000 1000-1200 54 25 Ace, Omega Volvo, L&T, Greaves

Exhibit 2: Main Products of ECEL

Segment Pick N Carry Cranes Compactors

Source: Company, Monarch Research

RED

Escorts is engaged with India railways for more than five decades. The railway product portfolio is consist of brakes, couplers, shock absorbers, rail fastening systems, composite brake blocks and vulcanized rubber parts. It has became one of the leading suppler of the railways. Escorts is a leading manufacturer of auto suspension products including shock absorbers and telescopic front forks. Over the years, with continuous development and improvement in manufacturing technology and design, new reliable products have been introduced. Escorts has many technological and business collaboration with world leaders over the years. Few of its well know collaborations are Minneapolis Moline, Massey Ferguson, Goetze, Mahle, URSUS, CEKOP, Ford Motor Company, J C Bamford Excavators, Yamaha, Claas, Carraro, Lucky Goldstar, First Pacific Company, Hughes Communications, Jeumont Schneider, Dynapac. It has globally competitive indigenous engineering capabilities, over 1600 sales and service outlets and footprints in over 40 countries. Escorts is rightly placed to be the dependable outsourcing partner of world's leading engineering corporations looking at outsourcing manufacture of engines, transmissions, gears, hydraulics, implements and attachments to tractors, and shock absorbers for heavy trailers. In today's Global Market Place, Escorts is fast on the path of an internal transformation, which will help it to be a key driver of manufacturing excellence in the global arena. For this the company is going beyond just adhering to prevailing norms, it is setting its own standards and relentlessly pursuing them to achieve their desired benchmarks of excellence.

ASP

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Escorts Limited

Industry Outlook
T RACTORS In India nearly 140.3mn hectare of land is used for cultivation as per the as per the annual report of 2009-10 released by the Indian agricultural ministry. Globally there is an average of 20 tractor per 1000 hectare of land and in India current average is only 18 tractor per 1000 hectare of land is used which shows huge potential in the tractor industry
KEY GROWTH DRIVER:

AGRICUTURE

Agricultural sector is the backbone of Indias economy. Agriculture segment is contributing nearly 10% to the Indias GDP. Recent studies show that the value of the total food market in India at present is about Rs.250000 crores (US $ 69.4 billion). The Indian government has sanctioned approval for a number of joint ventures and collaborations with foreign firms besides licensing several industries and fully export units anticipating an investment of about Rs.19100 crores (US $ 4.80 billion) in the segment. The foreign investments alone are expected to be more than Rs. 9100 crores (US $ 18.2 Billion). With respect to foreign investments and also a number of joint- ventures and collaborations with foreign firms, the consumer food segment in India has always remained the top priority. The total geographical area of India is 328.7 million hectares and about 140.3 million hectares of this is net sown area with 193.7 million hectares found to be the gross cropped area. With the improved focus in the agriculture farmers are getting benefit. This helps them to modernize there method of farming. This growth of the farm lead to the higher tractor sales I NDIAN T RACTOR I NDUSTRY In FY2009-10 there has been the highest tractor production been recorded at 433,207 units. With this it had break record high of FY200607. Indian tractor Industry has grown with a CAGR of 15% over FY20032010. this shows a significant gain in the industry.
40% 30%

Figure 2: Tractor Production in India

450,000 400,000

350,000
300,000 250,000 200,000 150,000

20%
10% 0% -10%

-20%
-30%

Tractor Production

YoY (RHS) Source: ACMA, Monarch Research

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Escorts Limited

Investment Arguments
T RACTOR
DEMAND TO EXCEL.

Figure 3: Growth Driver of Tractors

India is producing nearly one-third of the total tractor production in the world. For the coming period in the medium to long term of the period there is a strong growth expected in the tractor demand.

Exhibit 3: MSP of Crops

Source: Monarch Research

Rs/q 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11

Wheat 580 610 620 620 630 640 650 750 1000 1080 1100 1120

Rice 490 510 530 550 550 560 570 580 645 850 950 1030

Cotton 1575 1625 1675 1695 1725 1760 1760 1770 1800 2500 2500 2700

The tractor industry in India currently has structural demand drivers in place especially with the government focus on rural India. Raising Minimum Support Price (MSP) Indian government has taken several steps towards improving the growth of the Indian agricultural sector one of those is increasing the MSP of the almost all the crops. It has been witnessed in last five years MSP of all the crops has been double. This has greatly improved the profitability of most crops and enriched farmers who are a key driver for tractor demand.
Figure 3: MSP of Crops
3000 2500

2000
1500 1000 500 0

Weat

Rice

Cotton

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Escorts Limited

Investment Arguments
Interest Subvention
Figure 4: Agriculture Credit

Rs in Bn
921 768 633
450

The Agricultural Credit Policy emphasis on increasing credit flow at the ground level by various manner. Some of the basic steps for credit flow are: credit planning, adoption of region-specific strategies, rationalization of lending policies and procedures and bringing down the cost of borrowing. Bank credit is available to the farmers in the form of shortterm credit for financing crop production programmers and in the form of medium term - long term credit for financing capital investment in agriculture and allied activities like land development, including purchase of land, minor irrigation, farm mechanization, purchase of vehicle, etc. It has been witnessed over the past five yeas agricultural spending is going up significantly. Along with the agricultural credit, the scheme of loan waiver has increased the purchasing power of the farmer. Banks have significantly increased their lending in the agricultural sector. Investment in National Rural Employment guarantee Act (NREGA) NREGA is an act to provide a legal guarantee of 100 days of wage employment in a financial year to every rural household whose adult voluntary to do unskilled manual work at a minimum wage. As per the current policy rural laborers to get a job with a minimum of Rs.100 per day. Other than NREGA there are several other acts which government has launched to enhance the rural income. Some of these are Pradhan Mantri Gram Sadak Yogna (PMGSY), Swarnjayanti Gram Swarozgar Yojana (SGSY), Sampoorna Gramin Rozgar Yojana (SGRY), Bharat Nirman. Such schemes has initiatives in two-fold to the farmer: Increase in the cost of labor Lower Availability of farm labor

2007-08

2008-09

2009-10

2010-11

Source: Monarch Research

Figure 5: NREGA investments

NREGA investment (Rs in Bn)

391
300 401

120

2007-08

2008-09

2009-10

2010-11

Source: Monarch Research

This appears to have encouraged the farmers to own their own land and vehicle (Tractor)

Page : 7

Escorts Limited

Investment Arguments
Multi usage of Tractor Tractor are basically used in the irrigation facility. Till date we have seen that there is only 18 units per hectare whereas the average usage is nearly 20 units per hectare. Multi usage of tractor have caught the focus of the farmer towards owning there own tractor. Earlier tractor was only bout by the big land owner now a days even small land owner try to buy there own tractor. Apart from irrigation it can be used in transportation and hauling of luggage. So there is still high potential in the industry to grow. We expect the tractor industry will grow at a CAGR of 13% over the period of FY10-FY13. Escorts has plan to launch 8-10 new variants across all the segments. Smaller HP trucks are used successfully in the rural transportation and have replaced bullock carts. This was possible as government has taken many steps towards developing the rural infrastructure and improve the connectivity . Tractors have been also used un the construction segment for hauling of goods. Farmer are able to earn money buy renting the tractor after the plowing season. Escorts is present in almost all the segment of tractor. Tractors are mainly classified in there four segment.
Figure 6: HP wise sales volume of Escorts mix of Escorts
100% 90% 80% 70%

100% 90%

Figure 7: HP wise Sales volume mix of Industry

80%
70% 60% 50% 40%

60%
50%

40%
30% 20% 10% 0%

30%
20% 10%

0%
FY06 FY07 0-30 HP FY08 31-40 HP FY09 >40HP FY10

FY07

FY08 0-30 HP 31-40 HP

FY09 >40HP

FY10

30

Figure 8: Escorts % share in different

Escorts has dominated the market for high-end tractors (41-50HP). It has the highest market share in this category, at 16-20%. Company is also taking major steps toward the growth of <30 HP segment

25

20
15

10
5 0

FY06

FY07 0-30HP

FY08 31-40HP

FY09 >40HP

FY10

Source: Monarch Research

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Escorts Limited

Investment Arguments
Effect of Monsoon on truck sales It has been witnessed that there was a direct correlation between the rain fall and the tractor sales. This dependency has been reduced significantly led by two main reason: Improvement in the irrigation Facility. Usage of tractor in non-agricultural segment.
Figure 9: Rainfall and tractor Sales Corre40%

20%

0%

-20%

-40%
FY 02 FY 03 FY 04 FY 05 Rian fall FY 06 FY 07 FY 08 FY 09 FY 10

Tractor Sales Growth

Source: IMD, Monarch Research

For farmer the actual agricultural usage of the tractors is only for 3 months rest of the 9 month the tractors are more or less not used in farming process. So during this period tractors are rented out for several purposes other than agriculture i.e. haulage of construction material, material handling, etc. In such a scenario, tractors are preferred over commercial vehicles given its economic benefits and flexibility in terms of usage. Further, 90% of tractors sales being dependent on finance, the easy availability of finance plays a very important role in driving tractor sales.

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Escorts Limited

Investment Arguments
R ISING
POTENTIAL IN

S OUTH I NDIA

Escorts is continuously improving the market share current market share of Escorts is 14% the market share trend of the escorts is as follows:
Figure 10: Market Share of Escorts
16

14
14 12 10 8 6 4 2 0 9

12.8

13.7

14

14.1

14.2

FY04

FY05

FY06

FY07

FY08

FY09

FY10

Source: Monarch Research

Escorts is very strong in North India with a market share of 21% whereas in south India it has a very little presence. The companys South Indian market share is at 5% as of FY10. To improve its standing in South India, Escorts has planned to increase its Point-of-Presence in Sothern region and also customized its product. Expanding the Sales Network Currently Escorts has only one dealer in the southern region which is directly affecting its sales for this company has a plan to increase the dealer and built up the strong network. Escorts has launched rice-puddlers which can work in deep water as well. This is expected to enhance its market share in the region.
Figure 11: Region wise market share
25

Launch of products specific to South Indias needs:

20
15 10 5

FY04 FY05 North FY06 South FY07 FY08 East FY09 West FY10

Source: Monarch Research

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Escorts Limited

Investment Arguments
S IGNIFICANT
EXPORT

P OTENTIAL

Escorts has foot prints in the US, Europe and African countries and plans to expand its penetration in existing geographies and enter newer markets with strong export potential. Companys main focus is in the African Countries. As the African market has a great potential which can be utilized for the growth of the company. Escorts has won an order of 1430 tractors in FY10 worth US$40 mn from Tanzanians Government It is planning to start up two offices in Africa to expand its wing in African Market. Moreover we expect Exports contribution will be significant in the coming 3-4 years. F OCUS
TOWARD

I NCREASING

THE OPERATING MARGIN.

Escorts, has relatively less operating margin as compared to its peer. The company is taking various steps toward increasing its margin. For this company will increase its capacity utilization year-on-year. Further company is also trying to reduce its production cost. Company has a pricing power which help the company to increase the price of its end product. This helps the company to increase its margin significantly. Escorts is able to increase its Consolidated margin by 200bps on the basis of high growth and margins in the construction equipment business. Apart from this company is also able to increase its margin of the agro machine products and auto ancillary. We are expecting that Agro Machinery margin will increase by 60bps and reach to 9.6% by FY2013E apart from this auto ancillary business will also come to its break even point.
Figure 12: Operating Margins
30.0% 9.0% 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% 8.1% 7.8% 7.7%

7.7%

8.1%

20.0%
10.0%

4.7% 6.0%

6.5%

5.6%
4.5%

5.4%

0.0% -10.0%

1.1% FY08 FY09 FY10 FY11E FY12E FY13E

-20.0%
2008 2009 2010 2011E 2012E 2013E

EBIDTA Margins Cons

EBIDTA Margins Standalone

Agro Machinary

Auto Ancillary

Railway Equipment

Source: Company, Monarch Research

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Escorts Limited

Investment Arguments
H IGH G ROWTH B USINESS
POTENTIAL IN

E QUIPMENT C ONSTRUCTION ( C E )

Escorts Construction Equipment Ltd (ECEL) is a wholly owned subsidiary of Escorts. Is basically engaged in manufacturing and selling construction Share Share Rs.bn Rs.bn equipments like Pick N Carry cranes, Slew cranes, Crawler Cranes, fork% % Electricity 6,586 32 14,630 32 lifts and loaders. It has collaborations with various global players whose 2,787 14 6,191 14 Roads products are marketed by Escorts in India. 3,451 17 7,666 17
Eleventh Twelfth plan Telecom Railways 2,008 10 4,460 10 Irrigation 2,462 12 5,469 12 1117 5 2,481 5 Water 406 2 902 2 Ports 361 2 802 2 Airports 90 0 200 0 Storage 1273 6 2,828 6 Gas 20,542 100 45,630 100 Total
Source: Planning Commission, Monarch Research Figure 13: Sector wise break up of Infra order flow

Exhibit 4: Sector wise break up of Order Inflow

Source: Planning Commission, Monarch Research

We are expecting that there would be a spurt in growth of Construction Equipment business on the back of high government spending in the infrastructure segment. Infrastructure spending has been increased by 122% from 11th plan to 12th 5-year plan. Total spending of the 12th plan is expected to be Rs. 45630 bn. There are many organized as well as unorganized player in the Construction equipment industry. This complete industry can be classified as follows:
Figure 14: CE Industry Mix Figure 15: Earth moving Equipment Mix Figure 16: Material Handling Equipment Mix

Source: Company, Monarch Research

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Escorts Limited

Investment Arguments
Escorts has a wide range of products. It caters to almost all the big size segment of CE business for e.g. Pick-N Carry which is contributing 27% of the total Material handling segment, Back-hoe and excavators they both are contributing nearly 77% to the Earth moving segment. Escorts focus on big size and fast moving segment will translate into higher growth for the company. Further escorts has several technological tie up with global players to boost up companys R&D function. Company is aiming to be a one-stop-shop for its customer with the help of the technological up gradation. Escorts has a plan to launch 7-8 new products by FY 2012. Apart from the technological tie up it has collaboration with many global players to market its product in India as well as Globally. Escorts has recently launched its own back-hoe segment after the end of the non compete agreement with JCB. Escorts had 40:60 JV with JCB that sold JCB Escorts backhoe loaders. The British company had bought 40% of Escorts backhoe in 2003 under the non-compete act which had expired in FY2008. Currently the company is selling under its own brand JCB. We expect Escorts construction equipment will to grow at a CAGR of 16% over FY10-FY12E. led by improved industry dynamics, continued government thrust on infrastructure and improved operating leverage.
Figure 17: Segmental Revenue

Escorts has launched its backhoe loader- DIGMAX offering intelligent Hydraulics, maximum fuel.

Source: Company, Monarch Research

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Escorts Limited

Investment Arguments
S TEADY
GROWTH IN THE

R AILWAY B USINESS

Indian Railways has a plan to lay 2500 km of new lines and double or multiple ~30000 km of rail route by 2020.

Escorts manufacture railway components with a wide range of the product portfolio consisting of brakes, couplers, shock absorbers etc. It has partnered Indian Railways for a long time and has a wide product portfolio. Currently railway business is contributing 3% of its total revenue. It is expected that the company will get benefit from the railways modernization which India would have to implement eventually. Indian Railways are on the verge of expansion it is expected to increase its capacity by adding more lines as well as doubling existing lines in the next 10 years. It has a plan to lay 2500 km of new lines and double or multiple ~30000 km of rail route by 2020. Escorts is in the railway segment from last 3-4 decades this has built up the companys strong relationship with the Indian Railways. This has been proved by the companys success ratio (70-80%) of the filed tenders. A UTO C OMPONENT O E M DEMAND.
BUSINESS TO

G ROW

ON THE BACK OF STRONG

Escorts auto ancillary segment is engaged in the manufacturing of auto suspension products including shock absorbers and automotive products including die casting components, brake shoes and clutch plates. This segment is contributing 6% to escorts revenue. Currently this segment is a loss making segment on the back of less concentration and lower capacity utilization of the segment. In the coming 3-4 year it is expected that this segment will get benefit from the strong upcoming demand from the OEMs. It is expected that by FY13E there would be Capex of nearly Rs. 250-300bn across auto ancillary segment. There is a high boom in this segment due to the high volume growth in the entire automobile segment. Further there are many global players entering into the India for the auto parts because of Indias low production cost capacity. Further we expect auto ancillary segment segments to grow at 12-17% CAGR over FY10-12E led by rising disposable incomes, strong economic growth, low penetration levels, and healthy freight environment. Apart from all this industrial benefit even company has a plan to expand its auto ancillary segment by adding newer products in its portfolio. We expect that in coming 2-3 year this unit will be at its breakeven point.

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Escorts Limited

Investment Arguments
I MPROVING F INANCIAL Escorts Ltd is engaged in four Segment Agri-Machinery, Railway Equipments, Auto-Component, and Construction equipment. It is Indias 3rd largest tractor manufacture with a market share of ~15%. Company has endeavored towards expanding it self geographically as well as increasing its product portfolio has been directly reflected in the books of the company . This expansion has resulted CAGR growth of 6% over FY07FY10. we have forecasted a CAGR growth of ~19% over FY10-FY12E. Company is not only focusing on increasing its top-line but several steps has been taken to increase its bottom-line. EBITDA and PAT is expected to grow at a CAGR of 16% and 21% respectively . Such high growth is a result of improving margins. Escorts return ratio were lower due to higher leverage and lower profitability . We expect that going forward these ratio will improve with the reduction in the debt and increase in the profitability. We expect that ROCE will increase by 385bps to 10.42% from current 6.57. On the other hand ROE is expected to increase by 388bps to 11.73% from 7.855
Figure 18: Financial Snapshot of the Company

4,777 4,020 3,395 2,845 2,752 2,650

4,988

`in Crs
325

256
158 89 30 29 (5) (38) FY07 FY08 FY09 191 132 FY10

180
125 192 259

FY07

FY08

FY09

FY10
Sales

FY11E

FY12E

FY13E

FY11E FY12E FY13E Net Profit

35 28

Operating Profit
40

15 10 5 8 6

10

12 10

30
20 10 8 3 (1) FY07 4 11 20 15 20 14

27 21

5 -

2 (1)

(5)

(2) (4) FY07 FY08 FY09 FY10 FY11E FY12E FY13E ROCE ROE

(10)

(5) FY08 FY09 EPS FY10 FY11E FY12E FY13E CEPS

Source: Monarch Research
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Escorts Limited

Investment Arguments
R EDUCED L EVERAGE The company has consistently made efforts to reduce the leverage. From levels of 0.89 in the year 2007-2008, the company has successfully managed to bring down the debt burden and skimmed the ratio to almost 0.15. This is a positive sign as the interest burden has lessened over the past years, however the company can have a threat of being underleveraged and compromise growth if the ratio stays too low. This reduction in the leverage is the result of the company's efficient management of its working capital as well as increase in the profitability.
Figure 19: Debt/Equity

D\E

0.89

0.89

0.28

0.24

0.20

0.20

0.15

FY07

FY08

FY09

FY10

FY11E

FY12E

FY13E

Source: Monarch Research

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Escorts Limited

Valuation
Escorts was incorporated in 1944 with the name of Escorts Agent Ltd. Escorts is running over last 6 decades and during this phase company has evolved it self as one of India's largest Engineering conglomerates operating in the high growth sectors of agri-machinery, construction & material handling equipment, railway equipment and auto components. Today escorts is the 3rd largest manufacture of the tractors in India. It is Continuous expanding its foot prints geographically. It has been widening its product portfolio in all the segment in which it is operating. Going forward the company does not have a plan of the major capacity expansion rather company is working toward increasing its capacity utilization level . We have a strong faith on the company's business. We expect the revenue and profit of Escorts to grow at 19% and 21% CAGR to `4,777 and `192 Crs during 2010 to 2012E period respectively. At the CMP of `137 the company is trading at multiples of 10.06X and 6.55X of its FY2011E and FY2012E EPS of `13.61 and `20.89 respectively. We initiate coverage on Escorts with a BUY rating with a price target of `167 in 15-18 month. Historically the company is trading between P/E band of 9-15 , we conservatively take the multiple of 8 with its FY2012E EPS of `20.89

Figure 20: PE Band Graph

300 250 200 150 100 50 -

Apr-07

(50) (100)

Avg. Price

12

15

Source: Monarch Research

Page : 17

Apr-11

Apr-08

Apr-09

Apr-10

Jul-09

Oct-08

Oct-06

Oct-07

Oct-09

Jul-10

Jul-07

Jul-08

Oct-10

Jan-08

Jan-07

Jan-09

Jan-10

Jan-11

Escorts Limited

Concerns
Increase in Raw material Price Today for all automobile industry the major concern is of increase in the cost of steel. This has already reflected in the margins. Further in crease in the cost of the raw material will lead to Lower margins. Company has already taken steps to maintain its margin by increase the cost price of the end products. This able the company to pass the surplus cost of the material to the end user. Uncertainties in the Monsoon and Government Policies Major revenue of escorts is from the tractor segment . Sales of this segment highly dependent on the monsoon if there is less rain the sales can hamper. Moreover apart from rain Government policy plays major role. Any reduction in the agricultural credit or stabilization of MSP will lead less income of the farmer can reduce the tractor sales. World Economy concerns Slower than expected global recovery could impact future growth prospects and our earnings forecast Increasing Competition Escorts is currently working in four different segment which has increase the higher competition for the company. In railway segment the biggest constrain is of the unorganized player as for this segment company do not provides any special technological oriented product. In ASP segment Company is producing suspension in less volume which gives the company tight competitive environment from the other Auto ancillary player. Fluctuation in Currency The company is exposed to many countries substantial revenue is coming from its exports thus the company is exposed to currency Risk. Any adverse movement in the currency can have a substantial impact on the companys revenue.

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Escorts Limited

Profit & Loss

YEAR
Net Sales Growth (%) Expenditure % to Sales EBITDA EBIDTA Margins (%) Depreciation EBIT Other Income Interest PBT Tax PAT Growth (%) PAT Margins (%)

Balance Sheet
2010 2011E 2012E
Share Capital 4,887.38 Reserves Total 4.43 Shareholders Fund 4,562.32 Total Debt Total Liabilities 93.35 APP. OF FUNDS 325.06 Good Will 6.65 Gross Block Acc. Depreciation 61.38 Net Block 263.68 Investments Total Current Assets 88.99 Inventories 19.26 Sundry Debtors 333.41 Cash and Bank 74.82 Loans and Advances Total Current Liab. 258.59 Net Current Assets 34.40 Misc. Expenses 5.29 Total Assets

` in Crs.
2010 2011E 2012E 2013E
92.11 2,112.52 2,204.63 320.97 2,529.96 2,642.59 861.77 1,780.82 20.00 107.53 1,997.25 659.09 738.02 320.15 277.91 1,377.76 619.50 2.11 2,529.96 92.11 92.11 92.11 1,593.87 1,700.32 1,873.33 1,685.98 1,792.43 1,965.44 405.32 357.52 401.40 2,095.65 2,154.30 2,371.19 2,293.74 685.54 1,608.20 20.32 107.53 1,402.07 436.50 450.14 211.68 301.67 1,044.58 357.49 2.11 2,095.65 2,378.52 741.53 1,636.99 20.00 107.53 1,527.25 465.37 550.73 246.64 262.42 1,139.57 387.68 2.11 2,154.30 2,536.99 800.39 1,736.59 21.00 107.53 1,810.61 584.29 680.62 289.91 253.70 1,306.65 503.96 2.11 2,371.19

2013E YEAR

3,324.21 3,939.51 4,679.93 27.96 18.51 18.79

3,133.33 3,759.55 4,424.32 94.26 190.88 5.74 53.22 137.66 56.00 18.10 175.56 48.97 132.31 362.62 3.98 95.43 179.96 4.57 55.99 123.97 74.13 21.45 176.65 51.31 125.34 (5.27) 3.18 94.54 255.61 5.46 58.86 196.75 82.89 24.08 255.55 63.14 192.41 53.51 4.11

Cash Flow
YEAR
From Operations Profit Before Tax Depr. & Amort. Interest paid Operating profit Inc/(Dec) in Working Capital Tax Paid Net cash generated Cash Flow from Investing Activity Purchase of Fixed Asset Net Cash used in investing activity Changes in capital structure Inc. in Shares capital Interest Paid Inc/(Dec) in Loans Dividend Paid Net Cash From Financing Total Inflows Opening cash Balance Closing cash Balance

Ratios
2010
175.56 53.22 18.10 204.49 (95.81) (60.80) 47.88

2011E
176.65 55.99 21.45 254.09 4.77 (51.31) 207.56

2012E
255.55 58.86 24.08 338.49 (73.01) (63.14) 202.34

2013E YEAR
333.41 61.38 19.26 414.05 (85.29) (74.82) 253.94 Profitability(%) Operating Margin Net Margin (ROCE) Valuation Ratio P/BV P/CEPS EV/EBITDA Debt/Equity Current Ratio Du Pont Tax Burden Interest Burden Operating Margin Asset Turnover Financial Leverage ROE Valuation Earning per share CEPS BV GROWTH RATIOS (%) Net Sales EBITDA PAT

2010
5.74 3.98 6.57 0.76 6.91 8.67 0.24 0.05 0.75 0.91 0.06 1.59 1.24 7.85 15.49 20.14 183.04 27.96 21.01 362.62

2011E
4.57 3.18 5.75 0.71 7.07 8.73 0.20 0.04 0.71 0.89 0.05 1.83 1.20 6.99 13.61 19.69 194.60 18.51 (5.72) (5.27)

2012E
5.46 4.11 8.30 0.65 5.10 6.15 0.20 0.03 0.75 0.91 0.06 1.97 1.21 9.79 20.89 27.28 213.38 18.79 42.03 53.51

2013
6.65 5.29 10.42 0.58 4.00 4.50 0.15 0.03 0.78 0.95 0.07 1.93 1.15 11.73 28.07 34.74 239.35 4.43 27.17 34.40
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(57.45) (101.65)

(84.46) (159.47) (84.46) (159.47)

(104.61) (104.61)

30.52 (63.86) 117.03 (11.03) 42.14 (11.63) 103.21 91.58

(21.45) (47.80) (18.89) (88.14) 34.96 91.58 126.54

(24.08) 43.88 (19.40) 0.40 43.27 126.54 169.81

(19.26) (80.43) (19.40) (119.09) 30.24 169.81 200.05

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RATING SCALE: BUY - the stock is available at cheap valuation and has an upside of more than 20% and should be bought at the prevailing price. ACCUMULATE - the stock is fundamentally sound, however may/may not be available at cheap valuation. The upside is between 10%-20% and the stock can be bought on dips. HOLD - the stock is nearing its fair value and should be approached with caution. The upside value for this stock is under 5%-10% REDUCE - the stock is relatively expensive and/or has achieved its fundamental value and the upside is limited to under 5%. Profits must be taken on every rise, if any position made. EXIT - the stock has no more room for upside, and valuations are stretched. The company is overvalued and hence one must sell the stock and exit from the counter as there is a possibility of a correction of more than 10%.

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