Escorts LTD

Company Report Escorts Ltd
make more, for sure.

14 May 2011 Target ` 174
Data Matrix as on 13.05.11 (BSE) INVESTMENT RATIONALE

CMP (Rs) 128
52 Week High/Low (Rs) 246/94
Market Cap (Rs Cr) 3,426
Share Issued (Cr) 10.56
Equity Cap (Rs Cr) 102.28
EPS TTM(Rs) 16.23
P/E x TTM 7.88
P/BVx 0.76
Face Value (Rs) 10
Book Value (Rs) 167.51
Dividend Yield (%) 1.17
BSE Code 500495
BETA-Sensex 1.43 Valuation & Recommendations
Industry PE 15.15
Escorts is trading at P/E of 7.4x of its full year Sep ended 2011E EPS of Rs 17.42 and strong
recovery in its core business (Tractor) which is showing the revenue visibility for the upcoming
years. With the help of enhancing its current capacity and substantial cost reduction plan in
Shareholdings as on 31.03.11 forthcoming period escort will enjoy higher revenue and also improved operating margins.
Hence with the upside potential of around 36% we recommend to buy the stock at current
level for the target price of Rs 174 attainable within 18-24 months.
27% 31%
Company Outline
Escorts Ltd, one of the leading tractor manufacturers of the country offers a comprehensive
range of tractors in more than 45 variants starting from 25 to 80 HP, It's widely accepted and
26% preferred brands of tractors are Farmtrac and Powertrac. Escorts is also a leading
16%
manufacturer of material handling and construction equipment, it manufactures and markets
a diverse range of equipment like cranes, loaders, vibratory rollers and forklifts. The company
FIIs DIIs today is the world's largest Pick 'n' Carry Hydraulic Mobile Crane manufacturer. Apart from
Public & Others Promoters
these Escorts is also leading manufacturer of critical railway and auto component, it
manufactures Shock Absorbers, Couplers, Brake systems and Brake Blocks for Indian railway
while in auto component segment with the technical collaboration with Fichtel & Sachs,
Germany, it manufactures auto suspension products including shock absorbers, struts and
Share Price Movement
telescopic front forks.
Sensex Escorts
25,000 250 Financials YoY QoQ YoY
20,000 200 (Year Ended Sep) Q2Y11 %Chg Q2Y10 %Chg Q1Y11 Sep-10 Sep-09 %Chg
15,000 150 Net Sales 889.8 32.5 671.7 7.5 827.8 2745.7 2157.8 27.2
10,000 100 Operating Profit 57.7 -12.7 66.1 31.7 43.8 231.2 198.0 16.8
5,000 50 OPM% (chg in bps) 6.49 (335) 9.84 119 5.29 8.4 9.17 (75)
0 0 Profit After Tax 73.2 76.6 41.5 187.2 25.5 137.6 89.7 53.3
Jun-10
Jul-10
Aug-10
Sep-10
Oct-10
Nov-10
Dec-10
Feb-11
Apr-11
May-10
Jan-11
Mar-11
May-11
PATM% (chg in bps) 8.12 198 6.14 508 3.04 4.98 4.12 86
EPS (Rs) 7.2 56.7 4.6 187.6 2.5 13.5 9.9 36.0
Source: ACE Equity ` Crore
Vikram Singh +91-11-30211872

vikram_research@moneysukh.com
Mansukh Securities and Finance Ltd SEBI Regn No. BSE: INB010985834 / NSE: INB230781431
Office: 306, Pratap Bhavan, 5, Bahadur Shah Zafar Marg, New Delhi-110002 PMS Regn No. INP000002387
Phone: 011-30123450/1/3/5 Fax: 011-30117710 Email: research@moneysukh.com
Website: www.moneysukh.com
Market Share in Tractor (%) Industry Outlook

The growth of the Indian economy is always aligned with the agricultural growth and farm
output, however over the past several years the share of agricultural productivity in GDP of
India has gradually declined but still major population of the country especially from rural area
12 13 depends on the activities involved in the agricultural and farm output. Thus the main
equipment of farm production called Tractors also seen the growth of demand with the growth
of the economy over the past years. The key factors enabling the demand growth during the
9
last fiscal have been good south west monsoons in majority of the states resulting in robust
24 farm sector growth and this time again forecasting for monsoon is quite good, as per the
estimates of Indian metrological department this year rainfall is likely to be 98 percent of the
long-term average, hence this will result in encouraging the cultivation of land by farmers as
the demand and prices of food across the world is rising quickly.
21-20 HP 31-40 HP
41-50 HP Total Whole Industry Tractor Sales Growth
600000 2010-11
545,109 50
500000 2009-10 40
Gro wth (Yo Y %)
400000
30
300000 226,545
154,191 20
200000
70,194 89,450
100000 10
4,729
0 0
<20 HP 21-20 HP 31-40 HP 41-50 HP >51 HP Total
Use of Tractors in Construction & Infra Projects rising…

The cultivation of land is now almost totally depended on tractors and during the FY10 a strong
recovery has been seen and non-agricultural use of tractors (for haulage in construction and
infrastructure projects) continued to increase, benefiting tractor demand. Also, with
The profitability of tractor players is expected infrastructure projects and rural employment schemes increasing employment opportunities,
to remain healthy on back of the robust tractor availability of labor for agricultural activities continued to decline, persuading even farmers
demand and trend in favor of higher HP with medium-sized land holdings to either rent or purchase tractors. The profitability of tractor
tractor... players is expected to remain healthy on back of the robust tractor demand and trend in favor
of higher HP tractors, however it will remain exposed to adverse movements in commodity
cycles and irregular monsoons. In FY11 the demand for tractors has grown by 24% to 545109
from 440331 in FY10, Escort has also sold 66148 (22% more) tractors during the same year.
Escorts Tractor Sales Growth (YoY)

66,148
70000 2010-11 40
60000 2009-10 35
50000 Growth(%) 30
54,037
37,153 25
40000
20
30000 20,049 15
27,071
18,328
20000 8,946 10
8,638
10000 5
0 0
21-20 HP 31-40 HP 41-50 HP Total
Govt schemes like NREGA leads to shortage of Labour…

The scheme run by central govt for unemployed labors in rural areas like PMGSY (Pradhan
Mantri Gram Sadak Yojna) and Bharat Nirman, National Rural Employment Guarantee Act
(NREGA) are providing employment & minimum wage to landless laborers who were earlier
employed by land-owning farmers for unskilled farm work. This initiative taken by the
government will also reduce the availability of farm labor and further this will increase the cost
of labour that would be resulted in encouraging the land-owning farmers to go for for
increased farm mechanization and buy more tractors.
Schemes like NREGA providing employment to
laborers, Hence encouraging the land-owning
farmers to use more equipments like
Tractors... Diverse use of Tractors is going to create more demand…
Apart from cultivating land the demand for tractors in other segments is also increasing day by
day, the improvements in farm mechanization levels (with the drop of availability for cheap
labor in rural areas), increase in non-agricultural use of tractors, higher credit disbursements
for agriculture, and Governmental focus on the farm sector (larger budgetary allocations) are
also going to boost the sales of tractors in up coming years. The industry's profitability is
expected to remain healthy on back of robust demand and Government support in spite of the
high competitive intensity and vulnerability to adverse movement in commodity prices and
irregular monsoons. While some States in the northern region have achieved high levels of
tractor penetration and farm mechanization, on an all-India basis, the penetration remains
low, which along with the current shortage of farm labor and consequently rising labor costs,
are expected to lead to greater farm mechanization levels and use of tractors.
Modernizations of Railway will create demand for railway equipments…

Apart from being 3rd largest player in the tractor & other farm equipments Escorts also
manufacturers the components for the India railway since for the long period of time. Under
railway equipment Escort has wide product portfolio of brakes, couplers, shock absorbers etc.
As far as growth in railways is concern, for FY12 rail budget the Govt has proposed highest ever
For FY12 rail budget the Govt has proposed outlay plan of of Rs. 57, 630 crore. Rs. 9,583 crore provided for new lines and 1300 km new
highest ever outlay plan of of Rs. 57, 630 lines, 867 km doubling of lines and 1017 km gauge conversion targeted in 2011-12. All the
crore... expansion and modernization of the Indian railway will also drive the orders of Escorts as with
the forged strong relationships it has been involved with Indian Railways for the past 3-4
decades. Escorts is also likely to ink pact for supplying disc brake system for railway coaches to
Dako-CZ of Czech Republic. With this pact, Escorts will be able to offer cutting edge technology
and world-class disc braking systems for LHB design ''High Speed Passenger Coaches'' of the
Indian Railways. Adding to this, technology will give the company an edge over its competitors,
both in terms of quality of product as well as price.
Equipment for Construction & Auto also riding high…

Escorts with its wholly owned subsidiary ECEL is engaged in manufacturing and selling
construction equipments like cranes, forklifts and loaders. It also has collaborations with
various global players whose products are marketed by Escorts in India. In India Construction
sector accounts for nearly 45% of the total investment in infrastructure and is expected to be
Planed to Increase capacity & also launch new
the prime beneficiary of the surge in infrastructure investment in the near to medium term.
products in higher capacity engines & higher
With the spending of Rs 4 trillion in FY 2009-10 investments in infrastructure has reported
HP tractors...
CAGR growth of 18% % over the last three years. According to the Mid-Term Appraisal of the
11thFYP, Rs. 20.5 trillion is likely to be invested during the 11thFYP hence the strong
infrastructure outlay envisaged during the 11thFYP is expected to drive the inflow of orders to
construction companies as well as for the manufacturers of construction equipment like
Escorts.
Capacity Expansion & Cost reduction will improve the Revenue & Margins...
Escorts has planned to enhance the production capacity by about 50,000 units from the
current 90,000-95,000 units. This will be achievable by opening new manufacturing plants.
Moreover Escorts has also planned to increase capacity and will launch new products like
higher capacity engines, higher HP tractors, and also augmenting capacity in material handling
equipments, for this company has already set aside 1.65 billion rupees as capital expenditure.
To reduce the margin pressure Escorts has already raised prices twice during Jan-March now in
terms of product mix, it is also looking at massive cost reduction in all fixed and variable costs
within next 2 quarters.
Revenue Composition
7% FINANCIALS
4% 0%
Growth: Escorts has reported CAGR growth of 16% during the last five years in Net Sales while
the Net Profit of the company for the same period grew by around 28.6%. The Operating Profit
of the company during the last four year grew by 31.7%. Company has also managed to reduce
its Debt to Equity at 0.18x in Sep year ended 2010 from 1.92x in FY04. The Operating Profit
Margin of the Escorts has also been improved to 8.42% in the Sep year ended 2010 from the
89% operating loss margin of -2.14% Y2005. The PATM has also been improved to 4.98% in the same
period from 2.99% in Y2005.
Agri Machinery Auto Ancilliary
Railway Equipments Unallocate
Yearly Margins Growth 5000 Yearly Rvenue Growth

10 OPM%
NPM% 4000
8
6 3000
4 2000
2
1000
0
Sep-11(E)
Sep-05
Sep-06
Sep-07
Sep-08
Sep-09
Sep-10
-2 0
-4 Sep-05 Sep-06 Sep-07 Sep-08 Sep-09 Sep-10 Sep-11(E)
-1000
Net Sales (Rs cr) Operating Profit (Rs cr) Net Profit (Rs cr)
Yearly: Escorts is following the September to maintain its balance sheet and In year ended Sep
2010 Escorts has reported jump of 27.3% in Net Sales to Rs 2,745.73 crore, 16.8% in Operating
Profit to Rs 231.21 crore and 53.28% in Net Profit to Rs 137.55 crore. Operating Profit margin
(OPM) of the company during the same period declined by 75bps to 8.42% while on account of
reducing interest expenses by 75% its Net Profit Margin (NPM) surged by 86bps to 4.98% for
the same period.
1000 Quaterly Rvenue Growth

Quaterly Margins Growth
14
OPM% 800
12 PATM%
10
600
8
6
400
4
2
200
0
Q3Y2009
Q4Y2009
Q1Y2010
Q2Y2010
Q3Y2010
Q4Y2010
Q1Y2011
Q2Y2011
0
Q3Y2009 Q4Y2009 Q1Y2010 Q2Y2010 Q3Y2010 Q4Y2010 Q1Y2011 Q2Y2011
Net Sales (Rs cr) Operating Profit (Rs cr) PAT (Rs cr)
Quarterly: For the quarter ended March 2011 Escort has reported growth of 32.5% in Net Sales
from corresponding quarter (March 2010) of the last year and 7.5% from the pervious quarter
(Dec 2010), However, Operating Profit of the company came down by 12.67% yoy but
increased by 31.7% qoq, PAT of the company for the same quarter grew by 76.6% yoy & 187%
qoq. OPM of Escorts declined by 335bps yoy but up 119bps to 6.49 while PAT Margin surged to
198bps yoy & 508bps qoq to 8.12% during the same period.
FINANCIALS - Standalone
Quarter (Year Ended Sep) Q2Y2011 YoY % Chg Q2Y2010 QoQ % Chg Q1Y2011
Net Sales 889.82 32.48 671.68 7.49 827.78
Other operating income 11.99 209.02 3.88 20.38 9.96
Total Income 901.81 33.49 675.56 7.65 837.74
Total Expenditure 844.09 38.50 609.47 6.32 793.91
Operating Profit 57.72 (12.66) 66.09 31.69 43.83
OPM% (chg in bps) 6.49 (335) 9.84 119 5.29
Other Income 0 (100.00) 0.88 0.00 0
Q2Y2011 Top Line and Bottom Line both PBIDT 57.72 (13.81) 66.97 31.69 43.83
rose yoy as well as on sequential basis... Interest 6.25 625.00 0 69.38 3.69
Exceptional Items -1.24 (57.39) -2.91 (306.67) 0.6
PBDT 50.23 (21.59) 64.06 23.29 40.74
Depreciation 10.16 (17.87) 12.37 1.91 9.97
PBT 40.07 (22.48) 51.69 30.22 30.77
Tax -33.15 (424.36) 10.22 (727.84) 5.28
Profit After Tax 73.22 76.56 41.47 187.25 25.49
PATM% (chg in bps) 8.12 198 6.14 508 3.04
EPS (Rs) 7.16 56.67 4.57 187.55 2.49
EPS Annualised (Rs) 28.63 56.53 18.29 187.16 9.97
Key Ratios Sep-06 Sep-07 Sep-08 Sep-09 Sep-10

Performance Ratios
ROA (%) 1.31 -0.41 0.74 5.35 7.34
ROE (%) 3.70 -1.12 1.75 8.60 9.07
ROCE (%) 11.40 6.62 8.47 13.27 13.34
Growth Ratio
Net Sales Growth(%) 37.95 18.62 -4.04 8.27 27.25
Total Debt/Equity has been reduced to
Core EBITDA Growth(%) -32.39 -30.84 33.94 36.98 23.76
0.18x in Y10 from 1.13x in Y06...
EBIT Growth(%) -34.31 -44.37 31.12 95.35 29.32
PAT Growth(%) -51.39 -133.89 -284.32 655.94 53.29
EPS Growth(%) -51.39 -129.25 -270.05 655.94 35.95
Financial Stability Ratios
Total Debt/Equity(x) 1.13 0.71 0.61 0.19 0.18
Current Ratio(x) 2.04 1.94 1.76 1.22 1.59
Interest Cover(x) 1.36 0.81 1.38 2.49 4.62
Total Debt/Mcap(x) 0.65 0.45 0.81 0.26 0.14
Quarterly and Yearly Revenue & Earnings Growth

Qtr Growth (Year Ended Sep) Q3Y2009 Q4Y2009 Q1Y2010 Q2Y2010 Q3Y2010 Q4Y2010 Q1Y2011 Q2Y2011
Net Sales 582.00 598.86 600.22 671.68 806.21 667.62 827.78 889.82
Growth (%) 20.8 2.9 0.2 11.9 20.0 (17.2) 24.0 7.5
Other operating income 1.32 12.47 3.64 3.88 4.64 4.51 9.96 11.99
Total Income 583.32 611.34 603.86 675.56 810.85 672.13 837.74 901.81
Total Expenditure 520.16 534.31 551.98 609.47 732.53 639.48 793.91 844.09
Operating Profit 63.16 77.02 51.88 66.09 78.32 32.65 43.83 57.72
Growth (%) 76.0 21.9 (32.6) 27.4 18.5 (58.3) 34.2 31.7
OPM% 10.85 12.86 8.64 9.84 9.71 4.89 5.29 6.49
Growth (bps) 340 201 (422) 120 (12) (482) 40 119
Other Income 0.00 1.54 0.00 0.88 0.00 0.10 0.00 0.00
PBIDT 63.16 78.56 51.88 66.97 78.32 32.75 43.83 57.72
Interest 9.80 12.86 4.51 0.00 -0.28 6.11 3.69 6.25
Exceptional Items -0.06 0.32 0.00 -2.91 -0.64 15.49 0.60 -1.24
PBDT 53.31 66.02 47.37 64.06 77.95 42.12 40.74 50.23
Depreciation 11.91 12.82 11.92 12.37 9.56 9.64 9.97 10.16
PBT 41.40 53.20 35.45 51.69 68.39 32.49 30.77 40.07
Tax 19.18 -6.83 12.05 10.22 22.56 5.65 5.28 -33.15
Profit After Tax 22.22 60.03 23.40 41.47 45.84 26.84 25.49 73.22
Growth (%) 184.1 170.2 (61.0) 77.2 10.5 (41.4) (5.0) 187.2
PATM% 3.81 9.82 3.88 6.14 5.65 3.99 3.04 8.12
Growth (bps) 222 601 (594) 226 (49) (166) (95) 508
EPS (Rs) 2.45 6.62 2.58 4.57 4.52 2.62 2.49 7.16
Growth (%) 184.9 170.2 (61.0) 77.1 (1.1) (42.0) (5.0) 187.6
EPS Annualised (Rs) 9.80 26.47 10.32 18.29 18.08 10.50 9.97 28.63
Yearly Growth Sep-05 Sep-06 Sep-07 Sep-08 Sep-09 Sep-10 Sep-11(E)

Net Sales 1307.93 1750.77 2102.13 2051.51 2157.78 2745.73 4151.30
Other operating income 0.00 0.00 0.00 0.00 22.31 18.94 35.40
Total Income 1307.93 1750.77 2102.13 2051.51 2180.09 2764.67 4186.70
Total Expenditure 1335.88 1673.79 2000.20 1907.21 1982.14 2533.47 3899.91
Operating Profit -27.95 76.98 101.93 144.30 197.95 231.21 286.79
OPM% -2.14 4.40 4.85 7.03 9.17 8.42 6.91
Other Income 505.73 125.25 0.02 0.04 1.54 0.10 0.00
PBIDT 477.78 202.23 101.95 144.33 199.49 231.31 286.79
Interest 141.79 84.95 68.96 55.93 47.26 11.74 15.30
Exceptional Items 0.00 0.00 -5.36 -19.40 8.00 11.93 -0.60
PBDT 335.99 117.28 27.64 69.00 160.22 231.50 270.89
Depreciation 61.95 47.05 44.97 42.86 49.16 43.48 45.23
PBT 274.04 70.23 -17.33 26.14 111.06 188.02 225.66
Tax -8.07 15.44 -10.89 14.27 21.33 50.47 41.75
Provisions and Contingencies 243.02 0.00 0.00 0.00 0.00 0.00 0.00
Net Profit 39.09 54.79 -6.44 11.87 89.74 137.55 183.91
NPM% 2.99 3.13 -0.31 0.58 4.12 4.98 4.43
EPS (Rs) 5.41 7.59 -0.77 1.31 9.89 13.45 17.42
Balance Sheet - Standalone

Balance Sheet (Year Ended Sep) Sep-06 Sep-07 Sep-08 Sep-09 Sep-10
SOURCES OF FUNDS
Share Capital 72.23 83.69 90.71 90.71 102.28
Share Warrants & Outstandings 0.00 0.54 1.00 0.86 0.48
Total Reserves 946.34 1034.74 1110.95 1352.62 1635.07
Shareholder's Funds 1018.57 1118.97 1202.66 1444.19 1737.83
Secured Loans 422.54 414.04 422.63 253.79 283.78
Unsecured Loans 167.83 31.10 19.52 11.47 14.82
Total Debts 590.37 445.14 442.15 265.26 298.60
Total Liabilities 1608.94 1564.11 1644.81 1709.45 2036.43
APPLICATION OF FUNDS
Gross Block 1401.03 1436.96 1415.93 2059.83 2095.45
Less: Accumulated Depreciation 534.43 583.24 593.41 602.93 645.74
Less: Impairment of Assets
Net Block 866.60 853.72 822.52 1456.90 1449.71
Lease Adjustment A/c
Capital Work in Progress 21.47 13.40 14.43 10.71 19.43
Book Value enhanced by 125% to Rs 163.4 Pre-operative Expenses pending
/per share in Y10 from Rs 72.48/per Assets in transit
share in Y06... Investments 456.24 425.13 425.79 235.80 365.80
Current Assets, Loans & Advances
Inventories 172.49 158.49 201.96 199.49 295.50
Sundry Debtors 292.75 379.74 518.22 329.15 332.62
Cash and Bank 215.72 173.21 114.51 164.80 174.41
Other Current Assets 0.31 0.43 10.15 15.07 0.82
Loans and Advances 436.46 467.51 298.87 180.66 356.63
Total Current Assets 1117.73 1179.38 1143.71 889.17 1159.98
Less: Current Liabilities and Provisions
Current Liabilities 546.58 606.65 650.24 726.71 731.03
Provisions 399.37 407.04 169.90 189.68 234.50
Total Current Liabilities 945.95 1013.69 820.14 916.39 965.53
Net Current Assets 171.78 165.69 323.57 -27.22 194.45
Miscellaneous Expenses not written off 16.45 15.93 11.00 5.42 1.95
Deferred Tax Assets / Liabilities 76.40 90.24 47.50 27.84 5.09
Total Assets 1608.94 1564.11 1644.81 1709.45 2036.43
Contingent Liabilities 224.28 318.74 220.73 342.36 370.23
Book Value 72.48 75.35 79.84 150.25 163.37
Adjusted Book Value 72.48 75.35 79.84 150.25 163.37
NAME DESIGNATION E-MAIL

Varun Gupta Head - Research varungupta@moneysukh.com
Pashupati Nath Jha Research Analyst pashupatinathjha@moneysukh.com
Vikram Singh Research Analyst vikram_research@moneysukh.com
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Company Report Escorts Ltd

make more, for sure.

Data Matrix as on 13.05.11 (BSE) INVESTMENT RATIONALE

Vikram Singh +91-11-30211872

Market Share in Tractor (%) Industry Outlook

Use of Tractors in Construction & Infra Projects rising…

Escorts Tractor Sales Growth (YoY)

Govt schemes like NREGA leads to shortage of Labour…

Modernizations of Railway will create demand for railway equipments…

Equipment for Construction & Auto also riding high…

Yearly Margins Growth 5000 Yearly Rvenue Growth

1000 Quaterly Rvenue Growth

Key Ratios Sep-06 Sep-07 Sep-08 Sep-09 Sep-10

Quarterly and Yearly Revenue & Earnings Growth

Yearly Growth Sep-05 Sep-06 Sep-07 Sep-08 Sep-09 Sep-10 Sep-11(E)

Balance Sheet - Standalone

NAME DESIGNATION E-MAIL

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