Escorts –Buy- Anand Rathi
We initiate coverage on Escorts with a BUY rating and a target price of Rs202. We estimate the turnaround in operations, focus on core business, agri-equipment’s strong performance and potential from construction equipment and railway components segments would lead to a 68% net profit CAGR over FY09-12.
Escorts has re-invented itself by focusing on its core competencies and divesting peripheral businesses. We expect this to lead to faster new-product introduction.
Escorts’ tractor market share has slid more than 200bps over FY06-09. Now, with a better product portfolio, improved channels and good tractor demand, we estimate it would gain market share of 400bps over FY09-12.
Given the ongoing recovery in construction goods, we estimate the new launches to lead to a 20% revenue CAGR in the segment over FY09-12. This is also the case in the railway components segment.
At our target price of Rs202, the stock would trade at 10x 12-month forward earnings, a 25% discount to the target multiple for M&M’s core business. At that price, it would trade at 6.5x FY10e EV/EBITDA.
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