Escorts Kubota shares zoomed 257% in three years, more upside likely?

Shares of Escorts Kubota have rallied 257 per cent in the last three years. The large cap stock, which closed at Rs 460.02 on August 7, 2019 rose to a high of Rs 1,648 on the BSE today. An amount of Rs 1 lakh invested in the shares of Escorts Kubota three years ago would have turned into Rs 3.58 lakh today. In comparison, Sensex has risen 56.75 per cent during the period.

On the factors behind the rally, Manoj Dalmia, founder and director, Proficient Equities said, "The reasons that are fueling its rally could be being debt free for the first time in last five years, liability growth percentage reducing consecutively for the last two years and spend less than 1 per cent of its operating revenues for interest expenses. A target price of Rs 1,650 is recommended."

Ace investor Rakesh Jhunjhunwala held 1.39 per cent stake or 18.30 lakh shares in the farm equipment maker at the end of the June quarter.

Escorts Kubota stock opened higher at Rs 1,653 against the previous close of Rs 1,643.70 today. The stock trades higher than 50-day and 100-day moving averages but lower than 5-day, 20-day and 200-day moving averages.

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The share has gained 37.23 per cent in a year but fallen 13.6 per cent since the beginning of this year.

The stock has risen 5.57 per cent in a month and declined 4.38 per cent in one week. Total 3,633 shares of the firm changed hands amounting to a turnover of Rs 59.78 lakh on BSE. Market cap of the firm stood at Rs 21,696 crore on BSE.

The stock hit a 52-week high of Rs 1,930 on April 5, 2022 and a 52-week low of Rs 1183.20 on August 23, 2021.

On the outlook of the stock, Ravi Singhal, CEO, GCL said, "As a result of the Kubota Group purchasing a stake in Escorts, they have now become an MNC, and their R&D and product line will meet global standards. This will help to increase revenue and market share in the future. On the other hand, new export opportunities will emerge. Rs 1,450 is a strong support level, but it has the potential to rise to Rs 2,100-Rs 2,300 in the coming months."

Tirthankar Das, Technical & Derivative Analyst, Retail, Ashika Stock Broking said, "The auto index has remained resilient and outperformed the benchmark index in the recent correction and subsequent pullback, in that space Escorts remains one of the better pick. On the technical front since August 2019 prices are well channeled signaling sustained demand at present levels. The stock in recent period has rebounded taking support at the lower band of the rising channel, thus offering fresh entry opportunity. On the oscillator front, the daily RSI is in rising trajectory above its nine period average thus validates positive bias. At the same time, presence of bullish Harmonic 'Sea Pony' pattern since the start of FY22 indicates that price is likely to continue its move in the direction of the larger trend and hence can be expected to initially head towards Rs 1,850 levels in the coming sessions."

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However, the stock might see a correction instead of rallying further.

Ravi Singh, vice-president and head of Research, Share India said, "Escorts Kubota has shown good move in the past mainly due to a healthy growth in the agricultural sector. However, now the share price of the company is trading in overbought zone and may see some correction in the coming trading sessions taking cues from higher valuations, higher production cost, decline in tractor sales and subdued earnings growth. The stock may witness selling pressure to touch the levels of Rs 1,400 in the near term."

Vinit Bolinjkar, Head of Research, Ventura Securities said, "Improving tractor penetration in India, Escorts' partnership with Kubota and the recent business restructuring by the company have re-rated the stock, however, we believe that these positives have already been priced in. During FY19-22, revenue/ EBITDA/ net profit has grown at a CAGR of 4.9%/ 8.4%/ 15.4 per cent to Rs 7,238 cr/ Rs 922 cr/ Rs 736 cr respectively. EBITDA and net margins improved by 119 bps to 12.7% and 252 bps to 10.2 per cent , respectively. Improvement in product mix aided EBITDA margins, while the reduction in total debt (including lease liabilities) from Rs 281 cr in FY19 to Rs 52 cr in FY22 reduced the interest cost and improve net profit. The improvement in financials and other macro & qualitative factors rallied the stock price by 257 per cent in the past 3 years. As per the consensus estimates, the stock is trading at FY25 P/E of 16.0X, which is on the higher side (higher than its average P/E range of 12X) and hence provides a limited upside from the current price."

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Shareholding Pattern

15 promoters held 72.90 per cent stake in the firm and 1,64,277 public shareholders owned 25.30 per cent or 3.33 crore shares for the quarter ended June 2022. Of these, 1,63,109 public shareholders held 9.95 per cent stake with capital up to Rs 2 lakh.

Only 27 shareholders with 2.20 per cent stake held capital above Rs 2 lakh for the quarter ended June 2022 .

121 foreign portfolio investors (FPIs) held 55.95 lakh shares in Q1 of the current fiscal.

Outperforming Peers

Escorts Kubota has outperformed its peers in terms of stock market returns in the last three years. While shares of VST Tillers have gained 157.28 per cent, HMT Ltd has gained 88.89 per cent in the last three years.  

AR Ramachandran, co-founder & trainer, Tips2Trades is bullish on the agri stock.

"Despite a high-profile investor cutting his stake in the company, very low debt, strong fundamentals due to consistent profits coupled with steady capex plans have led to Escorts being a strong performer since the past few years. Currently, the stock is trading sideways and investors are advised to buy near dips close to Rs 1,450-1,470 for higher targets of Rs 1,950- Rs 2,040 in the coming months," he said.

Financial Performance

The stellar rally in the stock of Escorts Kubota reflects the financial performance of the firm in the last three years.

On an annual basis, net profit rose to Rs 736.47 crore for the fiscal ended March 2022 against Rs 478.93 crore profit for the fiscal ended March 2019.

Revenue for the March 2022 fiscal stood at Rs 7,282.65 crore against Rs 6,262.02 crore for the fiscal ended March 2019.

Operating profit excluding other income rose to Rs 995.41 crore in the last fiscal against Rs 724.53 crore for the fiscal ended March 2019.

Earnings per share (EPS) for the March 2022 fiscal stood at Rs 54.58 crore against EPS of Rs 39.07 crore in March 2019 fiscal.

In the June quarter of the current fiscal, the firm reported a 21.07 percent fall in net profit to Rs 140.64 crore against Rs 178.19 crore in the corresponding quarter of previous fiscal.

Sales rose 19 per cent to Rs 2,032.06 crore in the last quarter against Rs 1,707.32 crore in the June quarter of 2021.

On a quarter-on-quarter basis, the firm reported a 26.34 per cent fall in net profit from Rs 190.92 crore in the March 2022 quarter. Sales climbed 7.71 per cent from Rs 1,886.64 crore in Q4 of the last fiscal.

About Escorts Kubota

Escorts Kubota was formerly known as Escorts Ltd. In June 2022, the firm changed its name in the wake of Japan's Kubota Corporation increasing its stake in Escorts to 44.8 per cent by subscribing to new equity shares and through an open offer to the public shareholders of Escorts.

The company offers solutions for agriculture, infrastructure and railways. The company operates through four segments: Agri machinery, construction equipment, railway equipment and auto ancillary products.

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