Escorts Kubota Ltd – BUY

CMP – Rs. 2211/- share
Target – Rs. 2588/- share
Stop loss –Rs. 2070/- share

Escorts Kubota Ltd. (EKL) is one of the leading engineering conglomerates in India involved in the manufacturing of farming and construction equipment. The company has an in-house research and development centre and collaborations with global technology leaders. They have three business divisions consisting of agri-machinery which involves tractors, engines, spare parts and lubes. The other is the construction equipment division which manufactures material handling, road compaction and earth-moving equipment. The third division is the railway equipment division which manufactures brake systems, couplers, suspension systems, friction & rubber products. All the above equipment is manufactured at six plants located in the state of Haryana.

Why is Escorts Kubota Ltd. worth investing in?

• The total tractor industry volume, domestic and exports, in FY23 went up by 10.2% to 10.7 lakh units compared, which is a new record for the tractor industry, beating the last peak of FY21. 
• The domestic tractor industry went up by 12.2% to a record 9.45 lakh units in FY23 compared to 8.4 lakh units in FY22.
• EKL’s total volume went up by 9.7% to 1,03,290 tractors in FY23 maintaining its market share at 9.7%.
• For its agri-machinery business, EKL has a 1,200+ dealer count and continues to focus on channel expansion to cover the white spaces for both Powertrac and Farmtrac brands.
• In the construction equipment business, the outlook remains strong on account of sustained demand supported by the government’s continued thrust across all infrastructure avenues. Thus, the company expects the demand momentum to continue going forward.
• In the railway division, the company had a healthy order book of more than Rs. 1,000 crores in FY23, which was the highest in the company’s history. 
• With the company’s strategic focus on product diversification and export, they expect the railway equipment business segment to continue growth in double digits in FY24.

Outlook and Valuation

The company has sustained operational performance and market position across diversified business divisions which is likely to generate healthy revenues and profitability going forward. EKL’s margins remained impacted mainly in its agri-division owing to the inflationary pressures on input costs, and an unfavourable product mix. We expect margins to improve in FY24 on account of softening in commodity prices and a reduction in inflationary pressures across the globe. 

EKL is also likely to benefit from the global supply chain of Kubota, leading to an increase in exports over the medium term. The company also has plans to increase its manufacturing capacity to three lakh tractors per annum by FY28. The capex is likely to be funded only through existing cash balances and internal accruals which will create value for shareholders going forward. Thus, our outlook for the company remains positive.

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