ICICI Direct has given Buy recommendation for Escorts Kubota with a target price of Rs. 2390 in its research report issued on Sep 16, 2022

ICICI Direct’s research report on Escorts Kubota

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% • Past five year CAGR: 24.1%, 35.6% in EBITDA, PAT; cash positive b/s.Escorts Kubota passed a resolution to amalgamate Escorts Kubota India Pvt Ltd (EKI, JV between Escorts & Kubota in 40:60 ratio, tractor manufacturing entity) & Kubota Agriculture Machinery Pvt Ltd (KAI, JV between Escorts & Kubota in 40:60 ratio, including all farm machinery presence of Kubota in India) into Escorts Kubota Ltd for swap ratio of 5:129 & 5:220, respectively • In FY22, EKI & KAI had revenue of Rs 689 crore & Rs 1820 crore, respectively. EKI incurred a loss of Rs 96 crore while KAI generated profit of Rs 53 crore • This comes in line with the earlier announcement made at the time of Kubota acquiring a further stake in the company and joining as co-promoter. It is aimed at simplifying the group structure with listed entity now including Kubota’s complete presence in India.

Outlook

We await b/s of merged entity before incorporating the same in our financials. Keeping the standalone financials intact (erstwhile Escorts) & assuming to be merged entities operating unchanged, we value EscortsKubota on SOTP basis at Rs 2,390; valuing it at 25x PE on combined PAT in FY24.

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