Two men ride a tractor along a dirt road. (Photographer: Dhiraj Singh/Bloomberg)

Credit Suisse Initiates Coverage Of Escorts On Strong Earnings Outlook

Brokerage firm Credit Suisse is bullish on Escorts Ltd. on expectations of an extended profit cycle.

The brokerage house initiated coverage on the stock with an ‘Outperform’ rating and a target price of Rs 900, an upside of 30 percent from Thursday’s closing of Rs 717.

India's fourth-largest tractor manufacturer, Escorts, has seen a turnaround on account of new products that stabilised market share, and shedding of unprofitable divisions. The stock has risen 73 percent in 2017, compared to a 51.3 percent rise in the BSE Small Cap Index.

Despite two good years, we believe tractor cycle will remain strong for another two years as tractor cycles last seven-eight years, with an 8 percent compound annual growth rate.
Credit Suisse Asia Daily Report

Six of the 11 brokerages that cover Escorts have a ‘Buy’ rating on the stock, according to data available Bloomberg. The 12-month consensus price target stands at Rs 813, which indicates an upside of over 11 percent from current market price.

Tractors account for 80 percent of the heavy equipment maker's revenues and 95 percent of total profits.

Here are some of the other key highlights:

  • Margin on earnings before interest and tax to improve to 14 percent from financial year 2020 compared to the current 10 percent currently.
  • Key risks include fall in tractor volumes, lower activity in construction and railways, and competitive intensity within tractor makers.
  • Escorts’ story will be similar to that of TVS Ltd., where both market share and margins will catch up to industry levels. TVS’ price to earnings ratio multiple jumped to 30 times from 10 times in the last five years.