escorts 15042011

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50

75

100

125

150

ES CO RTS S EN SEX

Fundamental Pick

Initial Coverage

Escorts Limited

15th April 2011

Escorts, one of Indias leading engineering conglomerates, focuses

on fast growing agri machinery, construction equipment and rail-

way equipment segments, with leading positions in most sub-

segments in which it operates. Today Escorts is Indias 3rd largest

tractor manufacturer, largest mobile crane manufactures and 2nd

largest slew crane player. This shows the leading position of the

company. With renewed focus on core businesses and newly ap-

pointed professional management, we expect the company to be

key beneficiary of growth potential in Indias rural and infrastruc-

ture economies. We initiate coverage on the stock with 'BUY' rat-

ing with a price target of `167.INVESTMENT COGENCY:

T RACT O R D E M A N D T O EX CEL .

Main factors that boosts up tractor demand is government rural

development scheme such as:

Increase in Minimum Support Price

Interest subvention

Agri Credit SchemeApart from government policies, Monsoon also plays an important

role in the truck demand. For the coming year good monsoon is ex-

pected which will translate in to high tractor sales . Another impor-

tant factor that help the growth in the tractor sales is different us-

age of tractor apart from farming activity such as transportation

and hauling.

Company is customizing tractor according to the requirement of

the southern region and also working towards increasing the

point-of-presence in the Southern region to increase the market

share in South India

Companys expansion in Africa and increasing its foot print geo-

graphically gives the company a competitive edge by building its

brand Globally

Company is in the continuous process of upgrading its technol-

ogy and increase the utilization level to increase its operating

margin.

Key Share Data

NSE Symbol ESCORTS

BSE Code/Group 500495/B

Bloomberg Code ESC IN

Reuters Code ESCO.BO

Equity Capital (`Cr) 105.93

Face value `10

Market Cap. (`Cr) 1460.55

52W H/L (SENSEX) 94.10/245.95

Avg. Daily Volume 215223

Sector Automobile

Sensex 19696

Nifty 5911

Share Holding Pattern

Promoter 26.77%

FII 30.38%

DII 16.78%

Public & Others 26.07%

Stock Returns in (%)

1Mth 3Mth 6Mth

ESCORTS 6.73 -11.45 -38.81

NIFTY 5.82 -1.06 -4.28

Rating : BuyTarget Price :`167

Upside :20%

Time Frame: 15-18 month

CMP :`139 (as on 13/04/11)

Page : 1

Research Analyst

Dipti [email protected]# +91 79 26666717

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Escorts Limited

H IG H G RO WT H P O T E N T I A L I N E QUIPM ENT C O NST RUCT IO N B USI -

NESS

Escorts Construction Equipment Ltd (ECEL) is a wholly owned subsidiary

of Escorts. It is basically engaged in manufacturing and selling construc-tion equipments like Pick N Carry cranes, Slew cranes, Crawler Cranes,

forklifts and loaders. It has collaborations with various global players

whose products are marketed by Escorts in India. Today ECIL is the larg-

est mobile crane manufactures and 2nd largest slew crane player. Gov-

ernment.s focus towards the improvement of the Indian Infrastructure

will help the company to grow. Infrastructure spending has been in-

creased by 122% from 11th plan to 12th 5-year plan. Total spending of

the 12th plan is expected to be Rs. 45630 bn.

Nonetheless governments focus in the modernization and expan-

sion of the Indian Railway will give the company high potential.

H EALT HY F I N A N C I A L A N D V A L U A T I O N

We expect the revenue and profit of Escorts to grow at 19% and 21%

CAGR to`4,777 and`192 Crs during 2010 to 2012E period respectively.

At the CMP of`139 the company is trading at multiples of 10.21X and

6.65X of its FY2011E and FY2012E EPS of`13.61 and`20.89 respec-

tively. We initiate coverage on Escorts with a BUY rating with a price

target of`167 in 15-18 month. Historically the company is trading be-

tween P/E band of 9-15 , we conservatively take the multiple of 8 with

its FY2012E EPS of`20.89

Page : 2

FY09 FY10 FY11E FY12E FY13E

Revenue (` crs) 2649.63 3394.54 4020.36 4777.46 4988.46YoY -3.7% 28.1% 18.4% 18.8% 4.4%

EBITDA (` crs) 157.74 190.88 179.96 255.61 325.06Growth 419.6% 21.0% -5.7% 42.0% 27.2%

EBITDA (%) 6.0% 5.6% 4.5% 5.4% 6.5%PAT (` crs) 28.60 132.31 125.34 192.41 258.59Growth 176.1% 362.6% -5.3% 53.5% 34.4%

PAT (%) 1.1% 3.9% 3.1% 4.0% 5.2%

DEPS (`) 9.89 13.45 18.06 20.25 21.53EPS 3.55 15.49 13.61 20.89 28.07

BV (`) 176.99 183.04 194.60 213.38 239.35ROE (%) 2.01 7.85 6.99 9.79 11.73

ROCE (%) 5.34 6.57 5.75 8.30 10.42

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Escorts Limited

About the Company

Page : 3

Escorts was incorporated in 1944 with the name of Escorts Agent Ltd. It

was started as a small agency house by Mr. H.P. Nanda & Mr. Yudi

Nanda. Over the years company has evolved it self as one of India's

largest Engineering conglomerates operating in the high growth sectors

of agri-machinery, construction & material handling equipment, railwayequipment and auto components.

Escorts is one of the leading tractor manufactures with nearly 14% mar-

ket share. Escorts has pioneered farm mechanization in the country,

and played a pivotal role in the agricultural growth of India for over five

decades. Escorts caters comprehensive range of tractors with more

than 45 variants starting from 25 to 80 HP.

Exhibit 1: Brands of Escorts Tractor

Brand % of Volume HP Range Price Range (Rs. Lac) Comments

Powertrac 48 34-55 2.9-4.7 Utility TractorFarmtrac 50 34-75 3.2-5.5

Premium Trac-tor

Escorts 2 25-35 2.6-3.0 Economy tractor

Product

Range

Business

Escorts

Agri Machinery

Group (AMG)

Tractors (25-85

HP), Harrow,Ploughs, Tillers,

Bailers,

rotavators.

Railway

EquipmentDivision

Brake Systems,

Couplers,Shock

Absorbers, Rail

FasteningSystems.

Auto

SuspensionParts (ASP)

Shock

Absorbers.Front forks, leg

assemblies,

clutch plate,engine oil

Escorts

EquipmentConstruction

Ltd (ECEL)

Cranes,

Loaders,vibratory

rollers, Forklifts

AMG

Company Background

Source: Monarch Research

Source: Company, Monarch Research

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Escorts Limited

Business Segment of the company

Page : 4

Escorts has developed itself as a leading material handling and con-

struction equipment manufacturer. It is basically engaged in manufac-

turing and marketing diverse range of equipment like cranes, loaders,

vibratory rollers and forklifts. Escorts today is the world's largest Pick 'n'

Carry Hydraulic Mobile Crane manufacturer.

Escorts is engaged with India railways for more than five decades. The

railway product portfolio is consist of brakes, couplers, shock absorbers,

rail fastening systems, composite brake blocks and vulcanized rubber

parts. It has became one of the leading suppler of the railways.

Escorts is a leading manufacturer of auto suspension products including

shock absorbers and telescopic front forks. Over the years, with con-

tinuous development and improvement in manufacturing technology

and design, new reliable products have been introduced.

Escorts has many technological and business collaboration with world

leaders over the years. Few of its well know collaborations are Minnea-

polis Moline, Massey Ferguson, Goetze, Mahle, URSUS, CEKOP, Ford

Motor Company, J C Bamford Excavators, Yamaha, Claas, Carraro, LuckyGoldstar, First Pacific Company, Hughes Communications, Jeumont

Schneider, Dynapac. It has globally competitive indigenous engineering

capabilities, over 1600 sales and service outlets and footprints in over

40 countries. Escorts is rightly placed to be the dependable outsourcing

partner of world's leading engineering corporations looking at out-

sourcing manufacture of engines, transmissions, gears, hydraulics, im-

plements and attachments to tractors, and shock absorbers for heavy

trailers.

In today's Global Market Place, Escorts is fast on the path of an internaltransformation, which will help it to be a key driver of manufacturing

excellence in the global arena. For this the company is going beyond

just adhering to prevailing norms, it is setting its own standards and re-

lentlessly pursuing them to achieve their desired benchmarks of excel-

lence.

ECEL

Segment Industry Size (units) Market Share (%) Peers

Pick N Carry Cranes 5000-6000 54 Ace, Omega

Compactors 1000-1200 25 Volvo, L&T, Greaves

RED

ASP


Exhibit 2: Main Products of ECEL

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Escorts Limited

Industry Outlook

Page : 5

T RACT O RS K EY G RO WT H D R I V E R : A G R I C U T U R E

Agricultural sector is the backbone of Indias economy. Agriculture seg-

ment is contributing nearly 10% to the Indias GDP. Recent studies

show that the value of the total food market in India at present is aboutRs.250000 crores (US $ 69.4 billion). The Indian government has sanc-

tioned approval for a number of joint ventures and collaborations with

foreign firms besides licensing several industries and fully export units

anticipating an investment of about Rs.19100 crores (US $ 4.80 billion)

in the segment. The foreign investments alone are expected to be more

than Rs. 9100 crores (US $ 18.2 Billion). With respect to foreign invest-

ments and also a number of joint- ventures and collaborations with for-

eign firms, the consumer food segment in India has always remained

the top priority. The total geographical area of India is 328.7 million

hectares and about 140.3 million hectares of this is net sown area with

193.7 million hectares found to be the gross cropped area. With the

improved focus in the agriculture farmers are getting benefit. This helps

them to modernize there method of farming. This growth of the farm

lead to the higher tractor sales

I N D I A N T RACT O R I N D U S T R Y

In FY2009-10 there has been the highest tractor production been re-

corded at 433,207 units. With this it had break record high of FY2006-

07. Indian tractor Industry has grown with a CAGR of 15% over FY2003-

2010. this shows a significant gain in the industry.

In India nearly 140.3mn hectare

of land is used for cultivation as

per the as per the annual report

of 2009-10 released by the In-

dian agricultural ministry. Glob-

ally there is an average of 20

tractor per 1000 hectare of land

and in India current average is

only 18 tractor per 1000 hec-

tare of land is used which

shows huge potential in the

tractor industry

-30%

-20%

-10%

0%

10%

20%

30%

40%

150,000

200,000

250,000

300,000

350,000

400,000

450,000

Tractor Production YoY (RHS) Source: ACMA, Monarch Research

Figure 2: Tractor Production in India

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Escorts Limited

Investment Arguments

Page : 6

T RACT O R DEM AND T O EX CEL .

India is producing nearly one-third of the total tractor production in the

world. For the coming period in the medium to long term of the period

there is a strong growth expected in the tractor demand.

The tractor industry in India currently has structural demand drivers in

place especially with the government focus on rural India.

Raising Minimum Support Price (MSP)

Indian government has taken several steps towards improving the

growth of the Indian agricultural sector one of those is increasing the

MSP of the almost all the crops. It has been witnessed in last five years

MSP of all the crops has been double. This has greatly improved the

profitability of most crops and enriched farmers who are a key driver for

tractor demand.

Rs/q Wheat Rice Cotton

1999-00 580 490 1575

2000-01 610 510 16252001-02 620 530 1675

2002-03 620 550 1695

2003-04 630 550 1725

2004-05 640 560 1760

2005-06 650 570 1760

2006-07 750 580 1770

2007-08 1000 645 1800

2008-09 1080 850 2500

2009-10 1100 950 2500

2010-11 1120 1030 2700

Exhibit 3: MSP of Crops Source: Monarch Research

Figure 3: Growth Driver of Tractors

0

500

1000

1500

2000

2500

3000

We at Rice Cott on

Figure 3: MSP of Crops

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120

300

391 401

2007-08 2008-09 2009-10 2010-11

NREGA investment (Rs in Bn)

450

633

768

921

2007-08 2008-09 2009-10 2010-11

Rs in Bn

Escorts Limited


Page : 7

Interest Subvention

The Agricultural Credit Policy emphasis on increasing credit flow at the

ground level by various manner. Some of the basic steps for credit floware: credit planning, adoption of region-specific strategies, rationaliza-

tion of lending policies and procedures and bringing down the cost of

borrowing. Bank credit is available to the farmers in the form of short-

term credit for financing crop production programmers and in the form

of medium term - long term credit for financing capital investment in

agriculture and allied activities like land development, including pur-

chase of land, minor irrigation, farm mechanization, purchase of vehicle,

etc.

It has been witnessed over the past five yeas agricultural spending is go-

ing up significantly. Along with the agricultural credit, the scheme ofloan waiver has increased the purchasing power of the farmer. Banks

have significantly increased their lending in the agricultural sector.

Investment in National Rural Employment guarantee Act (NREGA)

NREGA is an act to provide a legal guarantee of 100 days of wage em-

ployment in a financial year to every rural household whose adult volun-

tary to do unskilled manual work at a minimum wage. As per the current

policy rural laborers to get a job with a minimum of Rs.100 per day.

Other than NREGA there are several other acts which government haslaunched to enhance the rural income. Some of these are Pradhan

Mantri Gram Sadak Yogna (PMGSY), Swarnjayanti Gram Swarozgar Yo-

jana (SGSY), Sampoorna Gramin Rozgar Yojana (SGRY), Bharat Nirman.

Such schemes has initiatives in two-fold to the farmer:

Increase in the cost of labor

Lower Availability of farm labor

This appears to have encouraged the farmers to own their own land and

vehicle (Tractor)Source: Monarch Research

Figure 4: Agriculture Credit

Figure 5: NREGA investments


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0

5

10

15

20

25

30

FY06 FY07 FY08 FY09 FY10

0-30HP 31-40HP >40HP

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

FY06 FY07 FY08 FY09 FY10

0-30 HP 31-40 HP >40HP

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

FY07 FY08 FY09 FY10

0-30 HP 31-40 HP >40HP

Escorts Limited


Page : 8

Multi usage of Tractor

Tractor are basically used in the irrigation facility. Till date we have seen

that there is only 18 units per hectare whereas the average usage is

nearly 20 units per hectare. Multi usage of tractor have caught the focus

of the farmer towards owning there own tractor. Earlier tractor was only

bout by the big land owner now a days even small land owner try to buy

there own tractor. Apart from irrigation it can be used in transportation

and hauling of luggage. So there is still high potential in the industry to

grow. We expect the tractor industry will grow at a CAGR of 13% over

the period of FY10-FY13.

Smaller HP trucks are used successfully in the rural transportation

and have replaced bullock carts. This was possible as government

has taken many steps towards developing the rural infrastructureand improve the connectivity .

Tractors have been also used un the construction segment for haul-

ing of goods.

Farmer are able to earn money buy renting the tractor after the

plowing season.

Escorts is present in almost all the segment of tractor. Tractors are

mainly classified in there four segment.

Escorts has dominated the market for high-end trac-

tors (41-50HP). It has the highest market share in this

category, at 16-20%. Company is also taking major

steps toward the growth of

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-40%

-20%

0%

20%

40%

FY 02 FY 03 FY 04 FY 05 FY 06 FY 07 FY 08 FY 09 FY 10

Rian fall Tractor Sales Growth

Source: IMD, Monarch Research

Figure 9: Rainfall and tractor Sales Corre-

Escorts Limited


Page : 9

Effect of Monsoon on truck sales

It has been witnessed that there was a direct correlation between the

rain fall and the tractor sales. This dependency has been reduced signifi-

cantly led by two main reason:

Improvement in the irrigation Facility.

Usage of tractor in non-agricultural segment.

For farmer the actual agricultural usage of the tractors is only for 3

months rest of the 9 month the tractors are more or less not used in

farming process. So during this period tractors are rented out for several

purposes other than agriculture i.e. haulage of construction material,

material handling, etc. In such a scenario, tractors are preferred over

commercial vehicles given its economic benefits and flexibility in terms

of usage.

Further, 90% of tractors sales being dependent on finance, the easy

availability of finance plays a very important role in driving tractor sales.

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Escorts Limited


Page : 10

R I S I N G PO T ENT IAL IN S O UT H I N D I A

Escorts is continuously improving the market share current market

share of Escorts is 14% the market share trend of the escorts is as fol-

lows:

Escorts is very strong in North India with a market share of 21% whereas

in south India it has a very little presence. The companys South Indian

market share is at 5% as of FY10. To improve its standing in South India,

Escorts has planned to increase its Point-of-Presence in Sothern region

and also customized its product.

Currently Escorts has only one dealer in the southern region which is

directly affecting its sales for this company has a plan to increase the

dealer and built up the strong network.

Escorts has launched rice-puddlers which can work in deep water as

well. This is expected to enhance its market share in the region.

-

5

10

15

20

25

FY04 FY05 FY06 FY07 FY08 FY09 FY10

North South East West

Figure 11: Region wise market share


14

9

12.8

13.714 14.1 14.2

0

2

4

6

8

10

12

14

16

FY04 FY05 FY06 FY07 FY08 FY09 FY10

Figure 10: Market Share of Escorts


Expanding the Sales Network

Launch of products specific to

South Indias needs:

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Figure 12: Operating Margins

Escorts Limited


Page : 11

S I G N I F I C A N T E X P O R T P O T ENT IAL

Escorts has foot prints in the US, Europe and African countries and plans

to expand its penetration in existing geographies and enter newer mar-

kets with strong export potential. Companys main focus is in the African

Countries. As the African market has a great potential which can be util-

ized for the growth of the company. Escorts has won an order of 1430

tractors in FY10 worth US$40 mn from Tanzanians Government It is

planning to start up two offices in Africa to expand its wing in African

Market. Moreover we expect Exports contribution will be significant in

the coming 3-4 years.

F O CUS T O WARD I N C R E A S I N G T H E O P E R A T I N G M ARG IN .

Escorts, has relatively less operating margin as compared to its peer.The company is taking various steps toward increasing its margin. For

this company will increase its capacity utilization year-on-year. Further

company is also trying to reduce its production cost. Company has a

pricing power which help the company to increase the price of its end

product. This helps the company to increase its margin significantly.

Escorts is able to increase its Consolidated margin by 200bps on the ba-

sis of high growth and margins in the construction equipment business.

Apart from this company is also able to increase its margin of the agro

machine products and auto ancillary. We are expecting that Agro Ma-

chinery margin will increase by 60bps and reach to 9.6% by FY2013Eapart from this auto ancillary business will also come to its break even

point.


1.1%

6.0%5.6%

4.5%

5.4%

6.5%4.7%

8.1%7.7% 7.8% 7.7%

8.1%

0.0%

1.0%

2.0%3.0%

4.0%

5.0%

6.0%

7.0%

8.0%

9.0%

FY08 FY09 FY10 FY11E FY12E FY13E

EBIDTA Margins Cons EBIDTA Margins Standalone

-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

2008 2009 2010 2011E 2012E 2013E

Agro Machinary Auto Ancillary Railway Equipment

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Source: Planning Commis-

sion, Monarch Research

Escorts Limited


Page : 12

H IG H G R O W T H P O T E N T I A L I N E Q U I P M E N T C O NST RUCT IO N ( C E )

B U S I N E S S

Escorts Construction Equipment Ltd (ECEL) is a wholly owned subsidiary

of Escorts. Is basically engaged in manufacturing and selling construction

equipments like Pick N Carry cranes, Slew cranes, Crawler Cranes, fork-

lifts and loaders. It has collaborations with various global players whose

products are marketed by Escorts in India.

We are expecting that there would be a spurt in growth of Construction

Equipment business on the back of high government spending in the

infrastructure segment. Infrastructure spending has been increased by

122% from 11th plan to 12th 5-year plan. Total spending of the 12th

plan is expected to be Rs. 45630 bn.

There are many organized as well as unorganized player in the Construc-

tion equipment industry. This complete industry can be classified as fol-

lows:


Eleventh Twelfth plan

Rs.bnShare

%Rs.bn

Share

%

Electricity 6,586 32 14,630 32

Roads 2,787 14 6,191 14

Telecom 3,451 17 7,666 17

Railways 2,008 10 4,460 10

Irrigation 2,462 12 5,469 12

Water 1117 5 2,481 5

Ports 406 2 902 2

Airports 361 2 802 2

Storage 90 0 200 0

Gas 1273 6 2,828 6

Total 20,542 100 45,630 100

Figure 13: Sector wise break up of Infra order flow

Figure 16: Material Handling Equipment MFigure 15: Earth moving Equipment MixFigure 14: CE Industry Mix

Source: Planning Commission,

Monarch Research

Exhibit 4: Sector wise break up of

Order Inflow

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Escorts Limited


Page : 13

Escorts has a wide range of products. It caters to almost all the big size

segment of CE business for e.g. Pick-N Carry which is contributing 27%

of the total Material handling segment, Back-hoe and excavators they

both are contributing nearly 77% to the Earth moving segment. Escortsfocus on big size and fast moving segment will translate into higher

growth for the company. Further escorts has several technological tie up

with global players to boost up companys R&D function. Company is

aiming to be a one-stop-shop for its customer with the help of the tech-

nological up gradation. Escorts has a plan to launch 7-8 new products by

FY 2012. Apart from the technological tie up it has collaboration with

many global players to market its product in India as well as Globally.

Escorts has recently launched its own back-hoe segment after the end

of the non compete agreement with JCB.

Escorts had 40:60 JV with JCB that sold JCB Escorts backhoe loaders. The

British company had bought 40% of Escorts backhoe in 2003 under the

non-compete act which had expired in FY2008. Currently the company is

selling under its own brand JCB. We expect Escorts construction equip-

ment will to grow at a CAGR of 16% over FY10-FY12E. led by improved

industry dynamics, continued government thrust on infrastructure and

improved operating leverage.


Escorts has launched its

backhoe loader- DIGMAX

offering intelligent Hydrau-

lics, maximum fuel.

Figure 17: Segmental Revenue

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Escorts Limited


Page : 14

S T EADY G RO WT H IN T H E R A I L W A Y B U S I N E S S

Escorts manufacture railway components with a wide range of the prod-

uct portfolio consisting of brakes, couplers, shock absorbers etc. It has

partnered Indian Railways for a long time and has a wide product port-

folio. Currently railway business is contributing 3% of its total revenue.

It is expected that the company will get benefit from the railways mod-

ernization which India would have to implement eventually.

Indian Railways are on the verge of expansion it is expected to increase

its capacity by adding more lines as well as doubling existing lines in the

next 10 years. It has a plan to lay 2500 km of new lines and double or

multiple ~30000 km of rail route by 2020. Escorts is in the railway seg-

ment from last 3-4 decades this has built up the companys strong rela-

tionship with the Indian Railways. This has been proved by the com-panys success ratio (70-80%) of the filed tenders.

A UT O C O M PO NENT B U S I N E S S T O G R OW ON T HE B A C K O F ST RO NG

O E M DEM AND .

Escorts auto ancillary segment is engaged in the manufacturing of auto

suspension products including shock absorbers and automotive prod-

ucts including die casting components, brake shoes and clutch plates.

This segment is contributing 6% to escorts revenue. Currently this seg-

ment is a loss making segment on the back of less concentration and

lower capacity utilization of the segment.

In the coming 3-4 year it is expected that this segment will get benefit

from the strong upcoming demand from the OEMs. It is expected that

by FY13E there would be Capex of nearly Rs. 250-300bn across auto an-

cillary segment. There is a high boom in this segment due to the high

volume growth in the entire automobile segment. Further there are

many global players entering into the India for the auto parts because of

Indias low production cost capacity. Further we expect auto ancillary

segment segments to grow at 12-17% CAGR over FY10-12E led by rising

disposable incomes, strong economic growth, low penetration levels,

and healthy freight environment.

Apart from all this industrial benefit even company has a plan to expand

its auto ancillary segment by adding newer products in its portfolio. We

expect that in coming 2-3 year this unit will be at its breakeven point.

Indian Railways has a plan

to lay 2500 km of new lines

and double or multiple

~30000 km of rail route by

2020.

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(1)(5)

4

15 14

21

28

83

11

20 20

27

35

(10)

-

10

20

30

40

FY07 FY08 FY09 FY10 FY11E FY12E FY13E

EPS CEPS

Escorts Limited


Page : 15

I M PRO VING F I N A N C I A L

Escorts Ltd is engaged in four Segment Agri-Machinery, Railway Equip-

ments, Auto-Component, and Construction equipment. It is Indias 3rd

largest tractor manufacture with a market share of ~15%. Company has

endeavored towards expanding it self geographically as well as increas-

ing its product portfolio has been directly reflected in the books of the

company . This expansion has resulted CAGR growth of 6% over FY07-

FY10. we have forecasted a CAGR growth of ~19% over FY10-FY12E.

Company is not only focusing on increasing its top-line but several steps

has been taken to increase its bottom-line. EBITDA and PAT is expected

to grow at a CAGR of 16% and 21% respectively . Such high growth is a

result of improving margins.

Escorts return ratio were lower due to higher leverage and lower profit-ability . We expect that going forward these ratio will improve with the

reduction in the debt and increase in the profitability. We expect that

ROCE will increase by 385bps to 10.42% from current 6.57. On the other

hand ROE is expected to increase by 388bps to 11.73% from 7.855


2

(2)

57 6

8

10

(1)

(4)

2

8 7

1012

(5)

-

5

10

15


%

ROCE ROE

89 30

158 191 180

256

325

(5) (38)

29 132 125 192 259


Operating Profit Net Profit

2,845 2,752 2,650

3,395

4,020

4,7774,988


Sales

`in Crs

Figure 18: Financial Snapshot of the Company

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Escorts Limited


Page : 16

R E D U C E D L E V E R A G E

The company has consistently made efforts to reduce the leverage.

From levels of 0.89 in the year 2007-2008, the company has successfully

managed to bring down the debt burden and skimmed the ratio to al-

most 0.15. This is a positive sign as the interest burden has lessened

over the past years, however the company can have a threat of being

underleveraged and compromise growth if the ratio stays too low. This

reduction in the leverage is the result of the company's efficient man-

agement of its working capital as well as increase in the profitability.


0.89 0.89

0.280.24

0.20 0.200.15


D\EFigure 19: Debt/Equity

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Escorts Limited

Valuation

Page : 17

Escorts was incorporated in 1944 with the name of Escorts Agent Ltd. Escorts is running over last 6 decades

and during this phase company has evolved it self as one of India's largest Engineering conglomerates operat-

ing in the high growth sectors of agri-machinery, construction & material handling equipment, railway equip-

ment and auto components. Today escorts is the 3rd largest manufacture of the tractors in India. It is Con-tinuous expanding its foot prints geographically. It has been widening its product portfolio in all the segment

in which it is operating. Going forward the company does not have a plan of the major capacity expansion

rather company is working toward increasing its capacity utilization level . We have a strong faith on the

company's business.

We expect the revenue and profit of Escorts to grow at 19% and 21% CAGR to`4,777 and`192 Crs during

2010 to 2012E period respectively. At the CMP of`137 the company is trading at multiples of 10.06X and

6.55X of its FY2011E and FY2012E EPS of`13.61 and`20.89 respectively. We initiate coverage on Escorts

with a BUY rating with a price target of`167 in 15-18 month. Historically the company is trading between

P/E band of 9-15 , we conservatively take the multiple of 8 with its FY2012E EPS of`20.89


Figure 20: PE Band Graph

(100)

(50)

-

50

100

150

200

250

300

t- - -

J

l- t- - - l t

-

J

- - l- -

J

- - l- - - -

Avg. Price 1 3 6 9 12 15

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Escorts Limited

Concerns

Page : 18

Increase in Raw material Price

Today for all automobile industry the major concern is of increase in the

cost of steel. This has already reflected in the margins. Further in crease

in the cost of the raw material will lead to Lower margins. Company has

already taken steps to maintain its margin by increase the cost price of

the end products. This able the company to pass the surplus cost of the

material to the end user.

Uncertainties in the Monsoon and Government Policies

Major revenue of escorts is from the tractor segment . Sales of this seg-

ment highly dependent on the monsoon if there is less rain the sales can

hamper. Moreover apart from rain Government policy plays major role.

Any reduction in the agricultural credit or stabilization of MSP will leadless income of the farmer can reduce the tractor sales.

World Economy concerns

Slower than expected global recovery could impact future growth pros-

pects and our earnings forecast

Increasing Competition

Escorts is currently working in four different segment which has increase

the higher competition for the company.

In railway segment the biggest constrain is of the unorganized player

as for this segment company do not provides any special technologi-

cal oriented product.

In ASP segment Company is producing suspension in less volume

which gives the company tight competitive environment from the

other Auto ancillary player.

Fluctuation in Currency

The company is exposed to many countries substantial revenue is com-

ing from its exports thus the company is exposed to currency Risk. Any

adverse movement in the currency can have a substantial impact on the

companys revenue.

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Escorts Limited

Profit & Loss

Page :

Balance Sheet

RatiosCash Flow

` in Crs.YEAR 2010 2011E 2012E 2013E

Net Sales 3,324.21 3,939.51 4,679.93 4,887.38

Growth (%) 27.96 18.51 18.79 4.43

xpenditure 3,133.33 3,759.55 4,424.32 4,562.32

% to Sales 94.26 95.43 94.54 93.35

BITDA 190.88 179.96 255.61 325.06

EBIDTA Margins (%) 5.74 4.57 5.46 6.65

Depreciation 53.22 55.99 58.86 61.38

EBIT 137.66 123.97 196.75 263.68

Other Income 56.00 74.13 82.89 88.99

nterest 18.10 21.45 24.08 19.26

PBT 175.56 176.65 255.55 333.41

Tax 48.97 51.31 63.14 74.82

PAT 132.31 125.34 192.41 258.59

Growth (%) 362.62 (5.27) 53.51 34.40

PAT Margins (%) 3.98 3.18 4.11 5.29

YEAR 2010 2011E 2012E 2013

Share Capital 92.11 92.11 92.11 92.1

Reserves Total 1,593.87 1,700.32 1,873.33 2,112.5

Shareholders Fund 1,685.98 1,792.43 1,965.44 2,204.6

Total Debt 405.32 357.52 401.40 320.9

Total Liabilities 2,095.65 2,154.30 2,371.19 2,529.9APP. OF FUNDS

Good Will 2,293.74 2,378.52 2,536.99 2,642.5

Gross Block 685.54 741.53 800.39 861.7

Acc. Depreciation 1,608.20 1,636.99 1,736.59 1,780.8

Net Block 20.32 20.00 21.00 20.0

Investments 107.53 107.53 107.53 107.5

Total Current Assets 1,402.07 1,527.25 1,810.61 1,997.2

Inventories 436.50 465.37 584.29 659.0

Sundry Debtors 450.14 550.73 680.62 738.0

Cash and Bank 211.68 246.64 289.91 320.1

Loans and Advances 301.67 262.42 253.70 277.9Total Current Liab. 1,044.58 1,139.57 1,306.65 1,377.7

Net Current Assets 357.49 387.68 503.96 619.5

Misc. Expenses 2.11 2.11 2.11 2.1

Total Assets 2,095.65 2,154.30 2,371.19 2,529.9

YEAR 2010 2011E 2012E 2013E

rom Operations

Profit Before Tax 175.56 176.65 255.55 333.41

Depr. & Amort. 53.22 55.99 58.86 61.38

nterest paid 18.10 21.45 24.08 19.26

Operating profit 204.49 254.09 338.49 414.05

nc/(Dec) in Working

Capital (95.81) 4.77 (73.01) (85.29)

Tax Paid (60.80) (51.31) (63.14) (74.82)

Net cash generated 47.88 207.56 202.34 253.94

Cash Flow from Invest-

ng Activity

Purchase of Fixed Asset (57.45) (84.46) (159.47) (104.61)

Net Cash used in in-

vesting activity (101.65) (84.46) (159.47) (104.61)

Changes in capital

tructurenc. in Shares capital 30.52 - - -

nterest Paid (63.86) (21.45) (24.08) (19.26)

nc/(Dec) in Loans 117.03 (47.80) 43.88 (80.43)

Dividend Paid (11.03) (18.89) (19.40) (19.40)

Net Cash From Financ-

ng 42.14 (88.14) 0.40 (119.09)

Total Inflows (11.63) 34.96 43.27 30.24

Opening cash Balance 103.21 91.58 126.54 169.81

Closing cash Balance 91.58 126.54 169.81 200.05

YEAR 2010 2011E 2012E 201

Profitability(%)

Operating Margin 5.74 4.57 5.46 6.6

Net Margin 3.98 3.18 4.11 5.2

(ROCE) 6.57 5.75 8.30 10.4

Valuation Ratio

P/BV 0.76 0.71 0.65 0.5

P/CEPS 6.91 7.07 5.10 4.0

EV/EBITDA 8.67 8.73 6.15 4.5

Debt/Equity 0.24 0.20 0.20 0.1

Current Ratio 0.05 0.04 0.03 0.0

Du Pont

Tax Burden 0.75 0.71 0.75 0.7

Interest Burden 0.91 0.89 0.91 0.9

Operating Margin 0.06 0.05 0.06 0.0

Asset Turnover 1.59 1.83 1.97 1.9

Financial Leverage 1.24 1.20 1.21 1.1ROE 7.85 6.99 9.79 11.7

Valuation

Earning per share 15.49 13.61 20.89 28.0

CEPS 20.14 19.69 27.28 34.7

BV 183.04 194.60 213.38 239.3

GROWTH RATIOS (%)

Net Sales 27.96 18.51 18.79 4.4

EBITDA 21.01 (5.72) 42.03 27.1

PAT 362.62 (5.27) 53.51 34.4

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Escorts Limited

DISCLAIMER: The information and views presented in this report are prepared by Monarch Research & Brokerage

(p) Ltd ( hereinafter referred as MRBPL) and is based on our analysis and upon sources that we consider reliable. We,

however, do not vouch for the accuracy or the completeness thereof. This Newsletter is for restricted circulation and not

for public distribution. The information furnished in this document is solely for your information and must not be repro-

duced or redistributed in any manner. All having excess to this document are required to observe such restrictions. The

information in this document is for personal information and we are not soliciting any action based upon it. Recipients

of this report should rely on their own investigation and take their own professional advice. Recommendation in this

report may or may not suit risk reward ratio of individual investors and hence should not be completely rely upon. The

analyst of this document certifies that the views expressed in this document are his or her personal views on the subjectand most accurate to the best of his/her knowledge. MRBPL and/or its affiliates, officers, directors, employees, remis-

ers at all various locations may from time to time hold any long or short positions and /or have any direct or indirect

interest resulting in monetary gains of any nature and /or have other potential conflict of interest with respect to any

view expressed in this document. Recipients may please note that neither MRBPL nor any associate(s) accepts any li-

ability or losses arising from the use of this information and views mentioned in this document. No part of this material

may be duplicated in any form and/or redistributed without MRBPLs prior written permission.

HONORS: Information contained in this report is obtained from various reliable sources such as capital line, company

website and in house data bank. We sincerely thank each different source for the valued information provided and pur-pose to use the information is just to share the information without any prejudice, malafied intention and/or for any

commercial gains.

RATING SCALE:

BUY - the stock is available at cheap valuation and has an upside of more than 20% and should be bought at the prevail-

ing price.

ACCUMULATE - the stock is fundamentally sound, however may/may not be available at cheap valuation. The up-

side is between 10%-20% and the stock can be bought on dips.

HOLD - the stock is nearing its fair value and should be approached with caution. The upside value for this stock is un-

der 5%-10%

REDUCE - the stock is relatively expensive and/or has achieved its fundamental value and the upside is limited to un-

der 5%. Profits must be taken on every rise, if any position made.

EXIT - the stock has no more room for upside, and valuations are stretched. The company is overvalued and hence one

must sell the stock and exit from the counter as there is a possibility of a correction of more than 10%.

WWW . MONARCHPROJECT. COM

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