Tractor industry growth is expected to recover in the second half due to favourable monsoon and release of subsidy by some state governments to purchase tractors.
ET Intelligence Group: The stock of Escorts, the country’s leading tractor maker, may continue to outperform peers in the second half of the fiscal following favourable monsoon condition in its key markets and superior volume visibility compared with other vehicle makers. It has gained 42 per cent over the past three months and outperformed the BSE Auto index by 22 per cent.
The total tractor sales volume in the country contracted by 10 per cent in the first half of the current fiscal after witnessing double-digit growth in the previous three fiscals. In the September quarter, a little push from the festive season and better rainfall in its dominant markets helped Escorts report a lower drop of 8.6 per cent in volumes compared with the 10 per cent drop in industry volumes.
Tractor industry growth is expected to recover in the second half due to favourable monsoon and release of subsidy by some state governments to purchase tractors. The company’s management believes this should benefit rural sentiments for at least 2-3 crop cycles.
During the recent festive period, demand seemed to improve since the extent of fall in volume growth contracted to 5 per cent from a drop of 15 per cent before the festive season. The inventory reduced to the equivalent of six weeks from 8-9 weeks before the festivities.
On the liquidity side, the company improved working capital days and free cash flow. The free cash flow was at ? 210 crores at the end of September 2019 compared with a cash out flow of Rs 330 crore in the year-ago quarter. On the macro side, the funding constraints reduced compared with the previous quarter.
In a conference call after the second-quarter earnings, Escorts anticipated a 5 per cent fall in the industry volume for FY20.
The volume guidance of the company implies flat volume growth in the second half. Analysts expect Escort’s volumes to fall by 5-6 per cent for the current fiscal and to improve by 7-8 per cent in the next fiscal.
In comparison with the makers of passenger cars, two-wheelers and commercial vehicles, tractor makers have a better volume visibility since majority of the tractors sold in India need not comply with new emission norms (BS-VI) which will be effective from April 2020.
Most automakers have remained reluctant to provide industry volume outlook due to uncertainty of consumer behaviour following new emission norms which will increase vehicle prices by 5-15 per cent. The tractor segment will have new emission norms effective from October 2020 and it will be limited for the tractors more than 50 HP capacity. Such tractors account for only 7 per cent of the total industry volume.
At Rs 652, Escort’s stock is available at 13.3 times the 12-month expected earnings, which is a 5.4 per cent discount to the five-year average multiple. Given a better volume visibility, the stock is expected to remain on investors’ radar.
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