MUMBAI :
Since covid-19 has largely impacted urban life, the rural growth narrative had a beneficial impact on the Escorts Ltd stock over the past few months. The company’s shares are up 25% compared to its pre-pandemic highs in February this year.
It’s almost as if investors expected the company to benefit from the pandemic.
But as Escorts’ Q1 results show, even tractor sales were slow due to covid, and could play spoilsport with the growth engine going forward as well. In fact, the company had to resort to cost-cutting measures to stem the fall in profits. Pre-tax profits still fell as much as 37% from the year ago period.
The fall in Q1 revenues of 25.4% came in marginally lower than Street’s expectations. Tractor sales dropped about 14% year-on-year during the first quarter due to the lockdown. Besides, the firm also saw a marginal drop in Q1 market share over Q4 due to channel issues. While the monsoon has been progressed well, some of the sales could still be disrupted due to covid-19 this year.
Note that this division contributed about 80% of its revenues and profits for the company; hence the progress over the next few quarters remains crucial. The management noted that it plans to ramp-up supply chains and increase production levels for the harvesting season in October.
One factor to watch is the slow-down in the construction equipment sales. The segment clocked sales of just 234 units compared to over 1000 units in the year-ago period. Margins were also lower in this segment.
Escorts railway order business were hit as well as covid-19 disrupted deliveries. The revenue decline of about 50% in this segment has been quite sharp. The management noted that this segment should see a pickup in deliveries is expected in the coming quarters. However, one worry is that orders flows have remained stagnant at ₹480 crore.
Escorts has, though, managed to reign-in costs significantly this quarter. Thanks to travel restrictions, the firm’s travel and promotional costs were lower. Besides, raw material costs were soft due to low commodity prices. The management has said that it plans to cut fixed costs by about 10-15% this year, which could further lead to savings this year. Further, Escorts product mix has been encouraging as higher margin product sales were better.
One positive is that the firm could see benefits kick-in next year from its engagement with its new partner Kubota. Also, the firm is improving its product mix for the Indian markets. Analysts say the cost reduction will benefit the company over the years. “The management’s confidence on improving margin across businesses through efficiencies and cost reduction is comforting and will further scale up RoCEs,” noted Edelweiss Securities in a recent report.
Still, the recent run-up in the stock price has spiked valuations considerably. The stock already trades at about 27 times 12-month earnings. With covid-19 evidently having an impact on the company’s performance, it’s high time investors took a note of it as well.
