India Equity Report | Company Update | Automobile - Tractors

Escorts Ltd. INR 155 Gateway to Prosperity

Accompanying Growth BUY Nov 30, 2007

Company Background Ratnesh Goyal

Escorts Limited (Escorts), an Escorts Group company was initially set up as rg@indiratrade.com
Escorts Agents Pvt. Ltd. in 1944 at Lahore. The company started operating
Arpit Jain
from New Delhi in the name of Escorts Limited since 1947. Escorts is into the
aj@indiratrade.com
business of manufacturing of agricultural-machinery like (Tractors & Paddy
Tranplanters), construction-material handling equipments like (Cranes, Front
End Loades, Forklifts, Rollers & Aerial Works Platforms), railway equipments
like (braking system, couplers, shock absorbers, composite brake blocks, rail
Info Codes
fastening system & vulcanised rubber components) and auto ancillary and two
Reuters : ESCO.BO
wheeler components like (shock absorbers, sturts & telescopic front forks).
Bloomberg : ESC IN
Escorts has its manufacturing facility at Faridabad in Haryana. Escorts markets
NSE : ESCORTS
its products across the country and also channelizes them globally in countries
like USA, Poland, Ghana, Tanzania, Malaysia, Australia, Tunisia, Chile, BSE : 500495

Turkey, Sri Lanka, Kenya, Bangladesh & South Africa.

Outlook of Escorts Sectors Market Data

⇒ The Indian Tractor market is the largest in the world, in terms of sales 52 Wk Range (INR) : 172 / 73
volumes. Many factors affect tractor sales including the monsoon, means Shares in Issue (mn) : 72.2
of irrigation and reach of water, government support prices for crops, Mkt. Cap (INR bn) : 11.0
commodity prices, crop production expenses & credit policy announced by BSE 2 Wk Avg Volume : 1612563
RBI (most relevant as more than 90% of tractor sales are on credit).
⇒ Tractor industry has been performing well in the last four years and the
trend is expected to continue in view of good rains in India. It recorded a Share Holding Pattern (%)
growth of 21.2% in volume over last FY & is expected to perform better Promoters : 30.62

with a lot of government focus shifting to agriculture in the 11th Plan. MFs, FIs & Banks : 20.29
⇒ Further the fact that Arable land area remains limited and water tables are FIIs : 20.71
shrinking; again add to the need for more mechanized farming. However Others : 28.38
Tractor density as well as the HP input per hectares is low relative to
international standards and the tractor population today is concentrated; all Investment Theme
this shows great potential for the growth in this industry.
Escorts has demonstrated some weary
⇒ It is is expected that Government agriculture credit estimated at INR 1940
figures in the last few years. However the
bn would escalate & Banks would continue their focus on tractor finance.
last two years are showing signs of
⇒ The Industry has also registered an increase of 16% in Exports & volumes
revival. It has been focusing on its key
have now begun significantly contributing to the Industry's total production. business segments & has divested from
⇒ Indian Economy has shown some fantastic growth figures in the last the rest. Further most segments it caters
financial year with Manufacturing, Construction and Infrastructure sectors to, have ample amount of growth potential
taking the lead this scenario would be beneficial for capital goods sector. associated with them, which can be very
⇒ With infrastructure identified as a key focus area by Government, well picked up by Escorts. In anticipation
development & construction of Roads & Highways, Ports & Airports would it has already initiated expansion and
continue, adding up prospects for the Industrial & Construction Machinery capacity enhancement processes.
sector with a large number of infrastructure projects on the anvil. On a slope, but in the reverse gear
Escorts Ltd.
⇒ Further the overall construction industry is expected to grow at around 15-
20% for the next few years. This should translate into a rise in demand of
% Growth in Automobile Sectors
the construction and material handling equipments. In India the auto sector
35
has grown at an impressive 16.82 % over last year. 30
30
⇒ India is the largest 3 wheeler market, 2nd largest 2 wheeler market & 4th 25
20
largest Commercial Vehicle market. It is poised to be the 3rd largest 15 16
automobile market by 2030. The key development of road infrastructure & 10 12
8
5 7
the connecting of major cities may further act as a growth driver. 0
⇒ Global giants like Toyota, Nissan, and Honda are eyeing on India as one of CV Tractor 2 Wheel Buses MUV

their manufacturing bases due to the cost and quality it has to offer. Source: Indira Research (FY 07)
⇒ Automobile exports have grown by over 40% in last few years and even
the auto components segment has seen a growth of 26% in exports.
⇒ The car and commercial vehicle segments have shown good growth in the
last FY. Even the 3 wheeler segment has posted a 28% growth. However Tractor Sales & Exports in India
there has been a slight slow down in 2- wheeler segment.
⇒ The two-wheeler industry comprises of motorcycles, scooters and mopeds.
Out of total market of 8.4 million in the year 2006-07, Motorcycles market
at 7.1 million accounted for 84.5% of the total market. Motorcycle industry
has been growing at a CAGR of almost 21.5% since last 7 years, even
though the growth in the last year has been slightly less. Sales Exports
⇒ The Indian Railways (Railways) has seen a fantastic turn around in the last
Source: Indira Research (FY 07)
few years. It has initiated unprecedented expansion plans targeting 1100
mn tn of freight and INR 8400 mn worth of passenger traffic. The plans are
not only to extend the routes but also number & types of trains running on
them. Expenditure only for expansion of new routes is estimated at INR
Factors of growth in tractor sales
300 bn over 5 years, where as the outlay for FY 07-08 is INR 310 bn.
1. Credit Policy announced by RBI
⇒ The Railways plan to double its freight transport capacity. This is one of the
2. Monsoon
main reasons that it has initiated more freight wagons and enhance current
network to run 23T axle trains and mineral routes to run 25T axle trains. 3. Means of Irrigation

This would be done by adding third and fourth lines between destinations 4. Reach of water

and installing automatic signaling between them. 5. Govt. Support prices for crops

⇒ Railways procure wagons based on RDSO’s designs. However, wagon 6. Commodity Prices
manufacturers will now be permitted to supply wagons of their own 7. Crop Production Expenses
designs, with RDSO recommended bogies, coupler, draft and brake gear.
These higher pay load, lower tare weight wagons with new technology
would be costlier compared to old wagons.
⇒ 700 Coaches were added to current trains in FY 06-07 and the railways Highlights of Railway Budget 07-08
plan to add 800 more coaches to popular trains this FY. The number of
1. 32% increase in total outlay
unreserved coaches is also likely to be increased by 50% for most trains.
2. Unprecedented addition of Coaches
⇒ 1250 coaches specifically for handicapped, old and disabled passengers
3. Major policies for Freight Wagons
are planed to be introduced into many trains over the next two years.
4. 162% rise in asset replacement funds
⇒ Newly designed coaches with increase passenger capacity have been
5. INR 7.2 bn allocated for Metro region
manufactured at Kapurthala Rail factory on a pilot basis and full fledged
6. INR 16 bn for Signal & Telecom work
manufacture is expected to commence soon.
7. INR 16 bn for New Lines
⇒ The outlay for Metropolitan transport projects is INR 7.2 bn in the current
FY. 150 new suburban trains are planned to be operational in Mumbai
alone with adequate expansions in other Metros too. Budget for overaged
asset replacement has also be increased to INR 55 bn a 162% rise y-o-y.

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Escorts Ltd.

Key Highlights
⇒ Escorts has decided to strategically focus on its major businesses and to Escorts Plants (Sep 06)
divest from others. The core businesses identified for long term growth are Name (Location) Units
Agriculture Machinery, Railway Equipment, Auto Components and
Faridabad (HAR)
Construction Equipment. Escorts is a dominant player in each of these.
Tractors : 98940
⇒ Agri Machinery Business Group (AMBG) demonstrated good improvement
in performance with an increase in turnover from INR 10.52 bn (15 months) Railway Brakes : 36000

to INR 16 bn (12 months). It has also posted an EBIT of 0.91 bn against Auto. Shock Absorbers : 4 mn

previous negative figures. Emphasis on agriculture growth in the country & Brake Blocks : 1.8 mn

various measures like additional area under cultivation, yield improvement, Buffer Couplers : 1200
easy and cheaper credit, translates into a lot of opportunities for AMBG. Hydraulic Shock Absorbers : 36000
⇒ AMBG also reached out close to its consumers and created a pan India Tractor Engines : 98940
Grid to provide Product, Service and Spares. It has also repositioned its Heating Elements : 180 km
international subsidiaries & regained significant market share. Pantnagar (UTR)
⇒ Based on man-machine utilization norms & with some optimal investment Railway Brakes : Data unavail.
in balancing equipment, AMBG is now capable of producing 98,940 Auto. Shock Absorbers : Data unavail.
Tractors p.a. on a 2 shift basis i.e. a 37% increase over the previous Brake Blocks : Data unavail.
capacity of 72,000 Tractors p.a. from the same assets.
Buffer Couplers : Data unavail.
⇒ The Railways equipment division has commissioned its new capacity at
Hydraulic Shock Absorbers : Data unavail.
Uttaranchal and the first dispatch has been made in Oct 2006. Full fledged
Heating Elements : Data unavail.
commercial production is expected soon. The Division plans to explore and
leverage the opportunities arising out of the New Railway policy, for a
substantial growth in the years ahead.
⇒ The auto components division has initiated steps to explore Technology Escorts Updates
sources of international repute for new product lines to participate in the ECEL has signed up with IHI Construction
huge opportunity provided by the rapidly growing Auto Component Sector. Machinery Ltd of Japan, the manufacturer
⇒ Escorts Construction Equipment Ltd. (ECEL) a 100% subsidiary of Escorts of crawler cranes, for the marketing of its
has shown a y-o-y increase of 80% in its Turnover and a substantially crawler cranes in India.
higher PAT of INR 267 mn against INR 49 mn in the previous fiscal year.
⇒ ECEL has also allocated an investment of INR 6 bn for setting up two ECEL has also signed up with Weihai
plants in Haryana & Uttaranchal, it is also considering to float an IPO Huata Building Machinery Co. Ltd, China
shortly, which will unlock a sizeable value for Escorts. ECEL is the market the largest manufacturers of tower cranes
leader in pick and carry cranes. for marketing its tower cranes in India.
⇒ Escorts is in possession of a large land bank at prime locations & it will
bring in lot of value in time to come, which will change Escorts’ fortune.

Key Financials Escorts Pantanagar Plant Benefits

Year Ended 31st Jun 04 * Sep 05 * Sep 06 * 1. Zero Excise Duty (16.32%) for 10 yrs
Revenue (INR mn) 13496.5 18623.5 18939.1 2. CST 1% instead of 4%
Rev. growth (%) 21.50 37.99 1.69 3. 100% Tax Holiday for 5 years
EBITDA (INR mn) (994.3) 2982.3 1697.8 4. 30% Tax Holiday for next 5 years
Net profit (INR mn) (3135.4) 390.9 190 5. Uninterrupted Power Supply
Shares outstanding (mn) 72.23 72.23 72.23 6. Power Tariff INR 2.5 per unit
EPS (INR) (43.4) 5.4 2.6
EPS growth (%) (1404.24) (112.47) (51.39)
P/E (x) (1.9) 16.8 43.9
EV/ EBITDA (67.8) 23.8 51.3
ROCE (%) (19.0) (18.6) 4.3
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Escorts Ltd.

Financial Statements
Income Statement (INR mn)
Year ended 31st Jun 04 * Sep 05 * % Chg Sep 06 * % Chg
Total Sales + Excise 12584.4 13124.8 4.29 17965.8 36.88
Other Income 2431.8 5883.1 141.92 1323.4 (77.51)
Change in Stocks (81.2) (30.5) (62.44) 245.5 (904.92)
Raw Material Con. 7724.3 9144.4 18.38 13184.5 44.18
Employee Exp. 2097.3 1857.9 (11.41) 1810.3 (2.56)
Excise 1519.7 384.4 (74.71) 350.1 (8.92)
Other Exp. 4588 4608.4 0.44 2492 (45.92)
Operating Exp. 16010.5 16025.6 0.09 17591.4 9.77
Operating Profit (3426.1) (2900.8) (15.33) 374.4 (112.91)
Total Interest 1584 1672.4 5.58 957.9 (42.72)
Gross Profit (2578.3) 1309.9 (150.80) 739.9 (43.51)
Net Dep. 557.1 528.6 (5.12) 395.5 (25.18)
Total Taxation 0.0 390.4 - 154.4 (60.45)
Net Profit/Loss (3135.4) 390.9 (112.47) 190 (51.39)

Four Years Balance Sheet (INR mn)

st
Balance Sheet as on 31 Mar 2003 Jun 2004 Sep 2005 Sep 2006
SOURCES OF FUNDS 16085.5 13678.3 11862.7 11294.9
Equity Share capital 722.3 722.3 722.3 722.3
Share Application Money 0.0 0.0 0.0 30.3
Preference Share Capital 0.0 0.0 0.0 0.0
Reserves & Surplus 7232.1 4096.7 4487.6 4677.6
Loan Funds 4807.4 6129.0 4523.7 4738.2
Unsecured Loans 3323.7 2730.3 2129.1 1126.5
USES OF FUNDS 16085.5 13678.3 11862.7 11294.9
Gross Block 9709.6 9827.4 9663.1 13594.5
Less : Revaluation Reserves 1204.7 1113.8 971.4 4785.8
Less : Accumulated Depreciation 3693.3 4240.4 4651.8 5019.0
Net Block 4811.6 4473.2 4039.9 3789.7
Capital Work in Progress 21.3 35.2 65.4 214.7
Investments 6239.0 6802.6 4970.4 4562.4
Net Current assets
Current Assets 11566.9 9925.4 10528.4 12604.7
Less : Current Liabilities 6929.5 7895.6 8053.1 10131.6
Total Net Current Assets 4637.4 2029.8 2475.3 2473.1
Misc. Expenses not written 376.2 337.5 311.7 255.0
NOTE
Bk Val Unquoted Investments 6197.5 6761.4 4929.2 4521.2
Mkt Val. Quoted Investments 19.0 32.0 52.7 39.5
Contingent Liabilities 198.6 2440.1 1544.1 2242.0
Dividend (%) 0 0 0 0
* Non Comparable because FY ended Sep 05 is of 15 months

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Escorts Ltd.

Quarterly Income Sheet (INR mn)

Quarter ended Sep 06 Dec 06 Mar 07 Jun 07
Income from Operation 5320.8 5178.2 5736.4 5155.0
Cost Of Operation 4649.7 4285.0 4607.7 4219.1
Operating Profit 671.1 893.2 1128.7 935.9
Recurring Income 945.7 0.0 0.1 0.0
Adjusted PBDIT 1616.8 893.2 1128.8 935.9
Financial Expenses 196.9 181.1 218.0 148.9
Depreciation 112.3 135.5 143.5 124.3
Other Write Offs 0.0 0.0 0.0 0.0
Adjusted PBT 1307.6 576.6 767.3 662.7
Tax Charges 173.6 13.8 42.6 (18.8)
Adjusted PAT 1134.0 562.8 724.7 681.5
Non Recurring Items 0.0 23.2 25.5 23.4
Other Non Cash Adjust 827.1 616.4 683.1 767.3
Net Profit 306.9 (30.4) 67.1 (62.4)

52 Wk – Index Relative Percentage Appreciation

Escorts with Sensex

Risks Associated
Though all the segments in auto sector showed growth, the overall sector appeared to lose its
buoyancy. The two wheeler segment on the contrary showed low growth figures. The tractor
segment demonstrated good growth, but possesses risks with a rise in microfinance rates,
monsoon or government policies. The railway division has good scope but again faces the tender
threat. The construction equipment segment faces intense competition for market share. Similar
threat is faced by the auto components segment for catering to the export and the domestic OEM
and After Market. Further as the rupee grows strong exports could be significantly hit.
In a Nutshell
A New growth story at Escorts has just begun. It has been able to demonstrate its new potentials
by erasing off the low financial profile attached to it in some of the past years and has got itself on
the right track. It has divested from most of its non core businesses and has taken steps to align
with its economical and managerial resources to remain focused on the core business viz.
Tractors, Railway Supplies, Construction & Automotive Equipments. The company is a dominant
player in each of these businesses and possesses requisite strengths like technical know-how,
solid brand equity, a loyal distribution network, technical manpower & professional management
to take these businesses to the global scale. It has already chalked out plans like repositioning of
its brand, expansions in facilities, enhancement of capacities, distribution of foreign technology to
take full advantage of the growth in each of the sector it is linked to.

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Escorts Ltd.

Indira Group Offices

Registered Office : Singh House, 3rd Floor, 23/25 Ambalal Doshi Marg, Fort, Mumbai 400023
Tel : +91-22-22656812 Fax : +91-22-22656985 Email : im@indiratrade.com
Administrative Office : Ramavat House, E-15 Saket Nagar, Indore 452018
Tel : +91-731-2566361 Fax : +91-731-2562117 Email : ii@indiratrade.com
Institutional Dealing Unit : Africa House, 3rd Floor, 5 Topiwala Lane, Lamington Road, Mumbai 400007
Tel : +91-22-30080675 Fax : +91-22-23870767 Email : ie@indiratrade.com

Rating Interpretation
Buy : Expected to appreciate more than 20% over 12-months Reduce : Expected to depreciate up to 10% over 12-months
Accumulate : Expected to appreciate up to 20% over 12-months Sell : Expected to depreciate more than 10% over 12-months
Trade Buy : Expected to appreciate more than 10% over 45-days Trade Sell : Expected to depreciate more than 10% over 45-days

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