Buy This Mid Cap Auto Sector Stock, Brokerage Sees Strong 17% Upside In 12 Months

ICICI Direct recommends "Buy" for Escort Kubota Limited (EKL) with a target price of Rs. 2,365 in its most recent research. The stock is likely to gain 17% in 12 months if purchased at the present market price, taking the estimated target price given by the brokerage into consideration. It is a Mid-cap Auto (Tractors) sector company with a market capitalization of Rs 26,795.16 crore.

The company is a prominent tractor maker domestically (10.3% FY22 market share). It also serves domestic construction equipment, railways space. FY22 sales mix - tractors 77%, construction equipment 14%, railways 9%. Kubota (Japanese company), a co-promoter with effective stake at 53.5%.

Current Market Price, 52-week low & high, and Returns over the years

The stock on Friday, 18 November, last traded at Rs 2,030.85 per share on NSE, gaining 0.77% as compared to the previous close. Its 52 week high level was recorded on 23 September 2022 at Rs 2,190 and the 52 week low was recorded on 30 June 2022 at Rs 1,306.70, respectively. 

 
The stock in a week has given 2.35% positive returns. In a month, it has given 2.73% positive return. In the past 3 months, the stock has given 12.59% positive returns. Over a year, the stock gave 12.65% positive returns. The stock in the past 3 years has given 207.87% multibagger returns. Whereas, in the past 5 years 192.71% multibagger returns.

Key Highlights

The brokerage said, "We recently attended Escorts Kubota's (EKL) analyst meet in Faridabad wherein the company revealed its mid-term business plan (MTBP)."

MTBP key highlights, FY28 targets: (i) aspiration to grow revenues to >2.5x of FY22 levels (i.e. ~Rs 22,500+ crore in FY28E, implied CAGR of 16.5%+); (ii) increase share of exports from ~6.4% in FY22 to ~15-20% in FY28E; (iii) target EBITDA margins to mid-teens; (iv) RoCE at 25-30% and RoE>18%.

Within segments, agri segment is expected to grow by 2.5x; construction equipment is expected to grow by 2x; whereas railway division is expected to grow by 3x by FY28E riding on new products under development.

It also shared firm capital allocation strategy wherein EKL will invest up-to 5% of net profit for R&D, innovation for new technologies; cash return to shareholders in the form of dividend + buyback at up-to 40% of net profit.

On the cash application part, it envisages ~Rs 3,500-4,000 crore as growth capex for MTBP for augmenting capacities including greenfield expansion, debt repayment at to be merged entity (~Rs 400-500 crore), inorganic opportunities (start-up investments) and return of cash to shareholders. 

"We came impressed with cultural shift, which EKL is seeing imbibing the best practices at Kubota and leverage opportunities that it sees to cross sell as well as development of EKL as one of the sourcing hubs for Kubota," the brokerage has said.

Valuation & Key Triggers for Future Performance

The company's stock price has grown ~24% CAGR in last five years from ~Rs 700 in November 2017, vastly outperforming Nifty Auto Index. We retain BUY rating amid wider opportunity at play with Kubota coming on board as co-promoter and strong financials amid healthy RoCE targets. Revising our estimates, we now value Escorts Kubota at SOTP-based TP of Rs 2,365 (25x P/E on core FY24E EPS; earlier TP of Rs 2,330).

Commenting on the key triggers for future price performance, the brokerage said, "Incorporating the positives, we expect sales to grow at a CAGR of 14.4% over FY22-24E, with consequent operating margins seen at 12.0% by FY24."

Disclaimer

The stock has been picked from the brokerage report of ICICI Direct. Greynium Information Technologies, the Author, and the respective Brokerage house are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to check with certified experts before making any investment decision.