Motilal Oswal has given Neutral recommendation for Escorts with a target price of Rs. 1700 in its research report issued on Nov 21, 2021

Motilal Oswal’s research report on Escorts

ESC’s board on 18th Nov’21 approved sale of ~6.4% stake in the company to Japan’s Kubota Corp. for ~INR18.7b (at INR2,000/share), taking Kubota’s stake to ~16.4% (after the extinguishment of the first round of treasury shares). This will trigger an open offer by Kubota for a 26% stake in ESC. Assuming the successful open offer and cancellation of all treasury shares, Kubota’s stake in ESC will rise to 53.5%. Its stake will rise further as it is consolidating its Indian operations under ESC by merging two JVs in India with ESC. These transactions further strengthen its relationships, which was initiated in Dec’18 through a JV and transited to ~10% stake purchase in Mar’20. With ESC being the only vehicle for Kubota in India, we expect faster leveraging of synergies from the India operations, with easier access to: a) global product knowhow (in Tractors and implements), b) global distribution network, and c) global supply chain (by leveraging India’s cost base). Factoring in share capital, excluding treasury, would result in ~9% dilution and ~4% cut in its FY23E EPS. We are also not factoring in mergers of the two JVs with ESC. After the first acquisition of stake in ESC by Kubota, the stock got substantially re-rated (from pre-Kubota LPA P/E of ~11.5x to ~20x currently). With this anticipated event behind us, we expect the focus to shift back to fundamentals.

Outlook

We remain cautious on the Tractor cycle. We now value ESC at 18x (v/s 15x earlier; in line with our target PE multiple for MM’s Tractor business) and maintain our Neutral rating with a TP of INR1,700.

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