Sector Outlook: Positive
Muted numbers on subdued demand
Escorts Kubota Ltd. (EKL), a company that manufactures tractors and construction equipment, reported mixed financial results for the fourth quarter of fiscal year 2024. The company’s standalone revenue reached Rs. 2,082 crores, showing a slight year-over-year increase of 4.6% but a 10.3% drop from the previous quarter. This drop was mainly due to decreased sales in both the tractor and railway segments by 12% and 11.3% respectively, although the construction segment did see a 23.8% increase in revenue. Despite these challenges, EKL’s earnings before interest, taxes, depreciation, and amortisation (EBITDA) rose by 12.8% compared to last year to Rs. 266 crores, thanks to strong profitability in the construction sector. However, this figure fell by 15% from the last quarter. The company’s profit after tax (PAT) also grew by 30.5% year-over-year to Rs. 242 crores, slightly above expectations, driven by better pricing, efficient operations, and successful cost management in the construction equipment division, which achieved a record profit margin of 10.7%.
Key Concall Highlights
Demand
- EKL expects a slight increase in domestic tractor sales for the financial year 2025, though they predict a slow start in the first quarter due to low groundwater levels, poor crop yields from the last season, and effects from current elections. However, they anticipate sales will pick up from August 2024 thanks to favourable monsoon predictions.
- The company maintains its inventory at a healthy level, estimated between 37 to 39 days, which is likely better than the industry average.
- Their retail financing operations are running smoothly without any major issues, although there was some caution in lending observed after December.
- In terms of regional performance, tractor demand was lower in the southern and western parts of India but stronger in the northern and central regions. The company is working on increasing its market share in the north, and while growth in Maharashtra (western region) has been slow, it remains a key focus area.
- The southern region, which makes up 15% of the market, does not significantly affect Escorts’ overall sales as their market share there is minimal.
- Kubota, a part of the company, saw decreased sales in Maharashtra and Karnataka, but expects improvements as these areas recover.
Agricultural Equipment
- Farm implement products contribution remains minimal, with the majority expected from the JV due to their higher ticket-sized products. Tractor OEMs hold a mere 5% market share, suggesting substantial growth potential.
Exports
- Export growth is anticipated to surpass domestic growth, with ongoing product development and partnership agreements with Kubota. The export base declined by 30% in FY24, with significant growth anticipated from FY26 onwards.
Other Highlights
- A capex of Rs. 300 crores is earmarked for FY25, compared to Rs. 175 crores in FY24, primarily directed towards product development and infrastructure, with potential additional capex of Rs. 400 crores for a greenfield project in Rajasthan, subject to negotiation.
- Merger of JVs yielded positive results in FY24, with improved margins noted in the last quarter. The JV is expected to contribute Rs. 2,000 crore in revenue, initially margin dilutive but targeted to align margins with Escorts’ standalone margins.
Valuation and Outlook
Escorts Kubota faces a tough year ahead with its Q4FY24 results showing mixed outcomes. While profit margins look promising, overall sales volumes are a concern due to a slowdown in key sectors like construction and agriculture, worsened by the ongoing elections. The company expects a slight improvement in sales later in the year if monsoon conditions are favourable. Despite this, there’s uncertainty in demand which could impact the company, especially as it competes with major players like Sonalika, TAFE, and John Deere in the agriculture market. The construction sector might see a temporary dip due to the elections and monsoon, but is expected to pick up afterwards thanks to government spending on infrastructure. The railway sector, on the other hand, looks set to grow steadily with ongoing government projects boosting demand. Escorts Kubota hopes to maintain its profit margins through stable commodity prices and better pricing strategies, but increasing its market share in the competitive tractor market remains a challenge.
