Why Escorts Is Bullish Despite Virus Turmoil
Automakers reported no sales in April and expect May to be subdued as economic activity resumes gradually amid the world’s strictest lockdown to contain the novel coronavirus. But Escorts Ltd., India's second-largest tractor maker, remains bullish during the period of turmoil, betting on pent-up demand.
Escorts, which beat estimates in quarter ended March, expects supply-side issues to continue but can be managed by planning. “Now when markets are opening up, customers are coming to the showrooms we see a lot of pent-up demand,” Bharat Madan, group chief financial officer at the farm equipment maker, said in a video interview with BloombergQuint. “Whatever 50-60 percent of the volumes that were lost will come back. We are quite bullish on the numbers from June-October. This period will see good demand.”
And while the auto industry is struggling with a slowdown amplified by the lockdown, Escorts sees margins improving on lower costs.
“Margin trajectory should actually improve whenever operations come back to normal,” Madan said. “Cost management and volumes are the two areas of focus. Cost will actually improve profitability in a scenario where volumes may get impacted slightly.”
- Escorts revenue fell 15 percent over a year earlier to Rs 1,381 crore in the fourth quarter. But margins improved to 14.08 percent compared with 11.63 percent in the previous year.
- Construction equipment revenue tumbled 40 percent to Rs 210 crore.
- Tractor segment's top line declined 16 percent to Rs 1,058 crore.
- While tractor volumes fell 20 percent to 20,108 units, margin for the segment increased by 2 percentage points.
What Will Work In Escorts’ Favour
Opening of farm markets, aggressive procurement of crops by the government and improved liquidity because of new financing for farmers augurs well for the tractor industry, Escorts’ management said. And it expects to return to growth path in the second quarter of 2020-21.
The Rabi harvest has been at a record high and should help rural sentiment in the near term, especially in the northern region, HSBC Global Research said.
This will be favourable for Escorts, given the relatively higher share in these markets, the brokerage said in a note. It expects a significant rise in tractor subsidies in Assam, Andhra Pradesh, Bihar, and Telangana, aiding sales in this and the next financial years.
Emkay Global expects the tractor segment to recover quickly due to pent-up demand and improved consumer sentiment owing to healthy Rabi output and expectations of a good monsoon. According to its note, volumes are expected to be at half the normal level in May and almost normal in June.