Escorts Kubota shares rally 7% post analyst meet. Here's why

Shares of Escorts Kubota climbed nearly 7 per cent in Monday's trade, as brokerages gave thumbs up to the company's medium-term business plan post analyst meet and a plant visit at Faridabad facility.

ICICIdirect said it attended Escorts Kubota’s analyst meet in Faridabad wherein the company revealed its mid-term business plan (MTBP). The FY28 targets included aspiration to grow revenues to over 2.5 times of FY22 levels; increase share of exports from 6.4 per cent in FY22 to 15-20 per cent in FY28E; target Ebitda margins to mid-teens; RoCE at 25-30 per cent and RoE of over 18 per cent.

"We came impressed with cultural shift, which Escorts is seeing imbibing the best practices at Kubota and leverage opportunities that it sees to cross sell as well as development of Escorts as one of the sourcing hubs for Kubota," it said.

The management also plans to increase dividend payout and do buybacks by utilising up to 40 per cent of profits, said Emkay Global.  This  brokerage has increased its FY24-25E EPS estimates slightly by 1-2 per cent, as we factor in the positive impact of the amalgamation of Kubota JVs.

"We reaffirm BUY with a target price  of Rs 2,500 per share from Rs 2,450 earlier), based on 25 times December 2024E core EPS and cash at Rs 359 per share (0.80 time book)," it said.

Sharekhan is positive on Escorts Kubota and expects an upside of 23-24 per cent from current levels.

"We believe Escorts Kubota  is well poised to gain market share in India and globally, driven by new product launches, increased share of non-agriculturalbased tractors, growing global footprints, and being the beneficiary of single exclusive vehicle of Kubota in India. The company has a healthy balance sheet with zero debt, strong FCF, and decent ROCE profile of 17-22 oer cent," it said.

Motilal Oswal said Escorts has intensified its focus on comprehensive growth across its business verticals. While the mid-term growth strategy seems to be in the right direction, the brokerage said it would watch for its effective execution.

Seamless execution in targeted areas such as market share gains in the domestic tractor industry, growth in exports through Kubota channel, benefits of sourcing/localisation, and recovery in margins (in-turn) would be the key monitorables, it said.

"However, in the near term, we believe uncertainty in the tractor cycle would continue, led by an anticipation of a sharp inventory correction in 3Q and the adverse impact of implementation of TREM-4 norms for over 50HP tractors from January 2023. This, along with a high base of FY23, would keep volume growth under check in the foreseeable future," it said.

Escorts stock trades at 24.9 times consolidated FY24E EPS, which is at a premium to its 10-year average of 12.6 times, driven by an improvement in operating parameters as well as the Kubota partnership.

"While the tractor cycle seems to be uncertain, the valuations are already reflecting volume recovery as well as the benefit of Kubota partnership," Motilal said while suggesting a target of Rs 1,875 on the stock.

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