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Escorts an Outperformer – ICICI Research

September 18, 2007

ICICI Equity Research has a BUY with an outperform rating on Escorts Limited with a price target of Rs 180.

The poor performance of the tractor segment dampened revenue and profit growth. Going forward, tractors’ sales is expected to pick up, expanding the company’s top line. The company also has auto ancillary component unit, which contributes around 4-5% to total revenues, but is running at losses. Escorts also manufacture railway equipment, which contribute 6-7% to revenues and reported PBIT of Rs 4.2 crore during the quarter under review.

Construction Equipment Business – Hidden Gem
Escorts operates this business segment under a separate 100% subsidiary company called ECEL and is planning to unlock the value of investments in the next 8-10 months. The construction business is valued at Rs 735 crore and core tractor and equipment business at Rs 636 crore, while the market capitalization of Escorts Ltd is around Rs 785 plus crore. This means at current price, the construction business is available almost free of cost.

A sum-of-the parts (SOTP) valuation gives is a target price of Rs 181.At the current price, the stock is available at attractive valuations of 9.4x consolidated FY08E EPS of Rs 10.9 and 14.7x standalone FY08E EPS of Rs 7.

Related Research Report:
Tata Motors to Unlock Value of its Subsidiaries.

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