The 70% rally in Escorts shares is hinged on a good monsoon and exports⁠— the orderbook will be key

Escorts
  • Escorts shares have jumped almost 70% since March 31.
  • According to analysts reports, Escorts is projected to see a revenue dip of nearly 24%, which is far better than many of its peers.
  • Escorts has aggressively increased its market share by launching new models in the last few years.
While coronavirus battered Indian automobile industry sales, investors were betting on Escorts long term prospects. The shares of the tractor major have jumped almost 70% since March 31— all thanks to the whopping demand for its tractors in rural India despite the economic slowdown.

According to Brokerage firm Edelweiss, Escorts sales have shown a positive recovery, driven by strong Rabi crop harvest, procurement by state governments at remunerative prices, healthy water levels and timely arrival of monsoon was the major sales driver in the past three months.

Here’s how the sales growth looks like in the past quarter:

EscortsAprilMay June
Sales growth %-86.60%-3.40%21.10%

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The June sales growth may seem encouraging, but the subdued sales of April and May is expected to drag the Q1 revenue. According to analysts reports, Escorts is projected to see a revenue dip of nearly 24%, which is far better than many of its peers.

StocksGrowth % since March 31
Escorts70%
M&M110.00%
Bajaj Auto48%
Eicher Motors59%

Targeting exports to create new growth avenues

Year on year, the company has been aggressively working towards expanding its export outreach. It has increased its presence in markets like Sri Lanka, Bangladesh and Nepal with the share of exports in total sales increasing from 1% in 2016 to around 4% in the last financial year.

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According to Edelweiss, Its recent tie-up with Japan’s Kubota may fast-track its export growth, where Escorts hold about 40% stake in the joint venture.

New model launches led to market share gains in the last 5 years

Escorts has aggressively increased its market share by launching new models in the last few years. The company was earlier known for its strong presence in mid-range tractors (i.e. 31-40 horsepower and 41-50 hp). However, the mid-range tractors constrained growth in western and southern India, where soil conditions suit the usage of lower HP tractors. Frequent launches across all segments enabled the company to gradually regain some lost market share in the last 4-5 years.

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The next growth engine for the company

The railways have been the fastest growing business for Escorts in the last 10 years. And, the management has been adding new products such as automatic doors for metros and high-speed trains, coach dampers, heavy-duty locomotive dampers, rubber to metal bonded products, and much more.

According to Edelweiss, the business has more than doubled in the past four years, while profits have expanded by over 3 times.

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“Over the last 5 years, its order book from the railway segment has increased to ₹500 crore in FY20 from ₹150 crore in FY16. Since the current order book is expected to get executed within 12-15 months, it presents healthy revenue visibility for the business,” the report said.

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