Geojit downgrades Escorts Kubota to ‘sell’ after profit falls 50% in Q2FY23

Domestic brokerage house Geojit Financial Services has downgraded Escorts Kubota to 'sell' from a 'buy' call earlier after the tractor manufacturer's net profit plunged 50 percent to ₹88 crore in the September quarter (Q2FY23).

The brokerage also reduced its target price to ₹1,783 from ₹1,918 earlier. The new target implies a downside risk of 11.5 percent from its current market price of ₹2,015 (as on November 17).

The decline in its net profit came on the back of higher commodity costs and lower-than-expected realisations from the tractor business. It posted a net profit of ₹176.7 crore in the corresponding period of the last financial year. Revenue from operations, however, rose 12 percent to ₹1,883.5 crore last quarter, as against ₹1,678.8 crore reported in the same period last fiscal.

"Overall rural sentiments are positive because of a normal monsoon and high crop yield. However, intense competition in the low HP tractor, higher discounts, inflation and limited government subsidies for FY23 have led to deferring certain capex for the current fiscal year. The stock is trading at its all-time high of 26x which is above its historical avg. of 18x. However, we believe, the stock is likely to trade in premium owing to Kubota corp. holding a major stake. Considering the near-term headwinds and margin pressure, we maintain our valuation at 20x on FY24E EPS with a target price of Rs. 1,783/share and recommend sell rating at CMP," the brokerage said.

Margins

As per the brokerage, in the last 3-4 quarters, the commodity cost has increased by 35 percent, and the full cost benefit is not achieved due to industry pressure. Despite a 70 bps increase in market share for the quarter, margin came below expectations due to unabsorbed inflation and commodity price hike and increase in other costs, it added. The company raised the price by 2 percent for the quarter and still some under-recovery of 5 percent is needed to get the normal benefit, according to the brokerage. Despite the subsequent price hike, Geojit expects the margin to remain under pressure for the near term and expects it to show some resilience in H2, owing to industry recovery and through operating leverage. It lowered margin expectation for FY24 by 190 bps to 13.2 percent.

Performance

Regionally, Maharashtra & Madhya Pradesh performed well but the north-central and eastern markets suffered from an erratic monsoon, noted the brokerage. It further said that in construction equipment, volume was adversely affected due to lower economic activity and margin contracted due to a surge in commodity prices. In railway, the company registered record sales of ₹182 crore.

"EL’s expanded portfolio & technology upgrades in tractors have resulted in improved numbers both in existing and newer geographies. Exports have grown by 26 percent YoY in H2FY23 and expect the same trend to continue for the full year. Strategic collaboration with Kubota has led to a higher global footprint. Contract manufacturing of EL and Kubota products under the brand “E Kubota” is expected to commence by the next quarter with an outlay of 30,000 capacity," the brokerage further pointed out.

Stock Price

The stock has risen 24 percent in the last 1 year and 6 percent YTD. In comparison, Nifty Auto has advanced 9 percent in the last 1 year and 17 percent. The stock has lost 1 percent in November so far, extending losses from a 4 percent decline in October. However, it rose for 3 straight months between July and September, rallying 47 percent in that period.

According to a MintGenie poll, 21 analysts on average have a 'sell' call on the stock.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.