Emkay Global Recommends Buying Escorts Stock with Target Price of ₹4,700

Emkay Global Financial is optimistic about Escorts and has given the stock a “Buy” rating with a target price of ₹4,700, as per their report dated October 8, 2024.

Upgrading Escorts to ‘Buy’

• Emkay Global has upgraded Escorts from an “Add” rating to a “Buy” with a new target price of ₹4,700 per share, valuing the stock at 30 times its projected earnings for September 2026. They have also included ₹320 per share in cash.
• The recent monsoon season brought about 8% more rainfall than usual, which has improved the outlook for the next crop cycles. With the tractor industry seeing a decline of 13% in the second half of FY24 and a flat performance in FY25 so far, Emkay believes tractors will enter a growth phase starting in the second half of FY25.
• Escorts is making several improvements in its products, sales channels, and capacity to seize opportunities in both India and export markets. A key driver of long-term growth is Kubota’s plan to increase sourcing from India, which could significantly boost Escorts’ business.

Tractor Industry to Recover After Good Monsoons

• This year’s monsoon had around 8% more rainfall than the long-term average, helping increase the acreage of Kharif crops. This has been the largest increase in four years, which is great for farm incomes.
• In addition to good monsoons, more water reservoirs are now available, and the industry is coming from a lower base after a tough year. Tractor volumes dropped 8% in FY24 (13% in the second half), and they have remained flat in FY25 up until August. However, this creates the potential for a strong recovery in tractor demand starting in the second half of FY25.
• Experts expect double-digit growth from December to March, with a positive outlook for the next two crop seasons. Escorts is expected to benefit from these factors, especially in the North and West regions of India, while Kubota will focus on the South. New products and better distribution channels are expected to further boost Escorts’ market position.

India is Becoming a Big Opportunity for Global Tractor Companies

• Global tractor manufacturers are increasingly sourcing tractors and components from India due to its cost advantages and strong supply chain. India has a strong presence in the sub-70 horsepower category.
• For example, CNH Industrial is planning to increase its component sourcing from India to $500 million by 2027. Kubota is also planning to raise its India-based sourcing to 15-20% of its global procurement by 2030, compared to 9% now. Even a small shift in Kubota’s sourcing to India could mean a $500 million opportunity for Escorts.

Escorts Taking Steps to Capture Export Opportunities

• Escorts is working on several initiatives to capitalize on export opportunities:
  1. They will introduce products designed specifically for Europe starting from the third quarter of FY25.
  2. Escorts has begun supplying parts directly to Kubota’s global network in addition to what is already supplied through joint ventures.
  3. They are expanding their distribution channels and working on dealer integration with Kubota.
  4. Escorts is also building a new manufacturing plant for tractors, engines, and farming equipment, with a phased investment of ₹45 billion to support future growth, both in India and globally.