Escorts Kubota shares trading near record high. Should you buy the auto stock?

Market


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

The company’s stock price has grown around 24% compound annual growth rate (CAGR) in last five years from around 700 in November 2017, vastly outperforming Nifty Auto Index. 

Brokerage house ICICI Securities has retained its Buy rating on Escorts Kubota shares amid wider opportunity at play with Kubota coming on board as co-promoter and strong financials amid healthy RoCE targets. The auto stock is trading near record high level of 2,189 per share that it had hit in September this year on the BSE.

“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 added. Incorporating the positives, it expects sales to grow at a CAGR of 14.4% over FY22-24E, with consequent operating margins seen at 12.0% by FY24.

Escorts has intensified its focus on comprehensive growth across its business verticals. While the mid-term growth strategy seems to be in the right direction, its effective execution would be watched, said another brokerage and research firm Motilal Oswal. The company is now focusing on leveraging strong synergy benefits for a comprehensive growth across business areas.

“However, in the near term, we believe uncertainty in the tractor cycle would continue, led by an anticipation of a sharp inventory correction in 3Q and the adverse impact of implementation of TREM-4 norms for >50HP tractors from Jan-23. This, along with a high base of FY23, would keep volume growth under check in the foreseeable future,” the note stated.

While the tractor cycle seems to be uncertain, the valuations are already reflecting volume recovery as well as the benefit of Kubota partnership, said Motilal while reiterated its Neutral rating with a target price of 1,875 apiece.

The vi.ews and recommendations made above are those of individual analysts or broking companies, and not of Mint.

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