Escorts Kubota Ltd – Tepid growth on subdued demand

Sector Outlook – Positive

EKL’s revenue for Q3FY24 increased by 3% YoY and 13% QoQ to Rs. 2,320 crores, but it was slightly below expectations due to lower railway segment revenues. The construction business grew by 49% YoY, but the railway and tractor segments saw declines of 18% and 3% YoY, respectively. 

EBITDA rose by 64% YoY to Rs. 312.7 crores, driven by higher profitability in the tractor business and steady margins in construction and railways. The tractor segment’s EBIT margin improved by 550 bps YoY, while the construction equipment and railway segments also saw margin improvements. 

The railway order book stood at Rs. 870 crores, with an 18% YoY revenue decline and an EBIT margin increase of 530 bps. Overall, EKL’s performance was strong in the construction and tractor segments, but the railway business faced challenges.

Concall Highlights

• Domestic tractor industry sales decreased by 4.9% to 235,000 units in Q3FY24 due to unpredictable and insufficient rainfall, resulting in delayed crop harvests and reduced rabi sowing.
• EKL’s domestic tractor sales dropped by 6% to 24,600 units, with a market share of 10.5% in Q3FY24.
• Export tractor sales industry-wide declined by 27% to 21,300 units, while EKL’s export sales decreased by 26% to 1,371 units in Q3FY24.
• EKL expects export volumes to reach between 20,000 to 30,000 units in the next 2 to 3 years. Around 47% of EKL’s export volumes in Q3FY24 were through Kubota’s global network.
• Construction equipment industry volumes grew by 31%, with EKL’s total volumes increasing by 49% to 1,800 units in Q3FY24, driven by growth in crane, compactor, and backhoe loader segments.
• Revenue from the Railway Equipment division fell by 18% to Rs. 200 crores in Q3FY24 due to a lower supply schedule from the railway department. EKL anticipates better performance in the railway division, with strong prospects in both freight and passenger wagon divisions. The order book for the railway division stood at over Rs. 9 billion at the end of Q3FY24.
• EKL’s inventory levels are currently at 35-38 days, and the company plans to focus on markets in western India, particularly Gujarat and Maharashtra, which currently contribute 21% of Total Insurable Value (TIV), and to some extent on southern markets (15-16% of TIV).
• The implementation of TREM 4 emission norms has led to a decrease in the industry size for the 41-50 HP tractor segment to 2% of the total market as of Q3FY24 (down from 7% in FY23), resulting in total sales of 20,000-22,000 units for the segment (a reduction of 30,000 units in 9MFY24).
• EKL incorporated its non-banking finance company (NBFC) in January 2024 and intends to apply to the RBI for a license in February 2024. Upon RBI approval (expected in 6-8 months), EKL plans to launch the NBFC arm in FY25 and commence financing operations.

Valuation and Outlook

Escorts Kubota Ltd. (EKL)’s Q3 results show a mixed situation for the tractor industry. Although tractor volumes dropped by 3% in the first nine months of FY24, EKL predicted a further 5-7% decrease in domestic tractor sales in Q4FY24E. This is due to unpredictable weather, lower water levels in reservoirs affecting farming, and poor harvests in the south. 

EKL’s market share stayed at 10.5% in Q3FY24, but it lost some ground in the domestic tractor and construction equipment markets. To regain market share, EKL plans to adjust prices, introduce new products, provide financing, improve dealer profits, and expand its network. 

The partnership with Kubota promises growth, but the full benefits are expected in FY26. Despite challenges in the tractor segment, steady profit margins are expected across all segments, helped by lower commodity prices and better pricing.