Table of Contents
Sector Outlook: Positive
Mixed bag of financials performance
Escorts Kubota Ltd (EKL) reported a standalone revenue of Rs. 24,762 million, which remained essentially flat annually and down 11.6% sequentially, beating market estimates of Rs. 22,705 million. The muted demand during the quarter was primarily attributed to the seasonal effect and a tepid export market. EBITDA saw a marginal YoY growth of 0.3% and a QoQ decline of 27.6%, reaching Rs. 2,676 million, falling short of estimates of Rs. 2,927 million. Despite the expansion of gross margins during the quarter due to favourable commodity prices, the EBITDA margin was reported at 10.8% (down 238 bps QoQ) while remaining flat YoY. This pressure was due to lower operational efficiency and dilutive impact caused by the merger, offsetting the positive effects of softer commodity prices. PAT was reported at Rs. 3,267 crores (up 53.2% YoY / up 7.6% QoQ), beating market estimates of Rs. 2,630 crores. The PAT margins stood at 13.2% (up 454 bps YoY / up 236 bps QoQ). Volume growth during the quarter remained under pressure, with tractor volumes at 25,995 units (down 0.9% YoY / down 14.4% QoQ). Export volumes weighed in during the quarter due to looming recessionary concerns in the European market.
Key Concall Highlights
Demand
- The company expects the domestic tractor industry to continue its growth trajectory with mid-single- digit growth for FY25. It expects improved demand due to government initiatives to stimulate the economy and upcoming changes in emission norm regulations. • Current inventory levels are between 35 to 37 days of stock on an annualized basis.
- High inventory levels and high buying prices hurt earnings in Q2, but price reductions will have a positive impact starting from Q3.
- The eastern part of the country, except Bihar, grew exceptionally well. This was primarily driven by subsidy sales and specific SOPs. With healthy rainfalls, a pickup in demand is expected from the west and southern regions.
- The company expects its financing arm to help the retail segment, especially on the backhoe loader side, where the number of first-time buyers and first-time users is relatively high.
Exports
- Exports have been mainly weak during the quarter owing to weakness in the European market; however, management expects the volume number to improve from Q4 onwards.
Other Highlights
- The company aims to maintain an entity-level margin of 12% – 13% in the next 1-1.5 years. • Margin impact due to the merger to be around 1.5% on a full-year basis.
- The supply of freight variants for approx. INR382 crores has been temporarily put on hold by RDSO.
- Management expects no significant change in material costs due to supply chain issues.
- The company is developing products for the Mexican and Southeast Asian markets. By the end of the fiscal year, products will be ready for the European market and for the Mexican and Southeast Asian markets by next year.
- The company increased prices in Q1 in anticipation of inflation, particularly on the rubber side, with tire prices rising due to environmental issues and increasing natural rubber prices.
Valuation and Outlook
EKL’s quarterly results showed muted revenue and EBITDA growth, with pressures on volumes and margins due to operational inefficiencies. The first half faced challenges from a mining slowdown, elections, and reduced footfall due to heavy rains. However, H2 is expected to see a moderate recovery, driven by favorable monsoons, government spending, and anticipated pre-buying from new emission norms. Merger-related integration and localization efforts should help margins recover, and the construction equipment segment is likely to rebound as activity resumes post-monsoon. While exports are impacted by European market slowdowns and geopolitical issues, recovery is expected by Q4. Medium-term growth remains promising, backed by strong domestic demand and overseas market recovery.
