At Escorts, we expect sales and PAT to grow at a moderate CAGR of 1.9% and -1.0%, respectively, in FY19-21E. We believe anticipated volume slowdown in tractor segment will arrest growth momentum, with margin profile expected to recover at a sedate pace. We value the company at | 430 i.e. 8x FY21E EPS of Rs 53.4/share (adjusted for treasury shares which amount to ~27% of issued capital) with a REDUCE rating on the stock.
The management expects the trend of outperformance in North and Central region to continue in FY20e as the reservoir level are low in Maharashtra and South. The guidance for tractor growth is given at 5-8% considering the fact of high base in FY19 and lower water level. However we believe that the current valuation is justifiable on the back of 13% earnings growth over FY19-21E and massive government push. We value EL at 13x FY21E EPS with a revised target price of Rs643 and upgrade our rating from Hold to Accumulate.
We expect ESC’s tractor volume to grow by 5% YoY in FY20E and fall by 7% YoY in FY21E. We reduce our construction equipment volume estimate by 8%/17% for FY20E and FY21E, respectively. We lower our revenue and EBIDTA estimates by 0.4%/2.4% and 5%/6% for FY20E/FY21E, respectively. Accordingly, we cut our EPS estimates by 10%/11% for FY20E/FY21E. In view of likely down-turn for tractor industry, slowdown in construction equipment segment along with poor visibility on tractor volume performance, we reiterate our REDUCE recommendation on ESC with a revised Target Price of Rs600 (from Rs760 earlier), valuing it at 11.5x FY21E EPS.