Escorts Kubota: The outperforming underperformer

Escorts Kubota, one of India's leading tractor manufacturer, has missed earnings estimates for all three quarters of the current financial year as tractor profitability remains under pressure.However, despite the weakness in financial performance, the company's shares have been outperformers over the last six months, delivering superior returns not only compared to the benchmarks - Nifty 50 and Nifty Auto index, but also against peers like Mahindra & Mahindra and VST Tiller Tractors.The company's margin has been dented due to high input costs, even slipping into single digits for the last two quarters.The management said that the December quarter margin miss, particularly in the tractor segment was due to unabsorbed commodity inflation and that this impact may take some time to normalise.However, shares of Escorts Kubota have gained 16.2 percent over the last six months, compared to the Nifty 50 and Nifty Auto indices, which have remained flat during this period.Escorts Kubota had a 10.3 percent tractor market share at the end of the previous financial year. Besides tractors, the company also caters to the domestic construction equipment and the railways segment. Tractors contributed to nearly three-quarters of the topline during the last financial year.Railways Chugging AlongOver the last three years, the company's railway equipment segment has grown at a compounded annual growth rate of 17.3 percent, faster than the core tractor business, which has grown 5.2 percent during the same timeframe. On the other hand, the construction equipment business has declined 2.2 percent.For the December quarter, the company's railways business reported its highest-ever revenue of Rs 249.3 crore, a growth of 43.4 percent from the same period last year. The division contributed 11 percent of overall topline, compared to 8.8 percent in the year-ago period.Order book for the railways business stood at over Rs 1,000 crore, including the first-ever slipped disc brake system and Train-18 damper order. The management has also expressed optimism of delivering similar growth going forward.Also Read: Tata Motors to raise $1 billion via stake sale in EV businessHowever, the company is losing market share in the core tractors business. For the nine-months ended December 2022, the market share for Escorts Kubota declined 22 basis points to 9.8 percent. On the flip side, Mahindra and Mahindra reported a 90 basis points jump in market share to 41.4 percent for its tractor business.Analysts believe that the outperformance from Escorts Kubota's shares is due to optimism stemming from the company's medium-term plans.During an analyst meet in November last year, the company said that it expects consolidated revenue to grow more than 2.5 times by financial year 2027-28, over the Rs 9,068 crore revenue it achieved in the previous financial year. It also guided for export revenue share to rise to 15-20 percent over the next five years from nearly 6.4 percent currently.JPMorgan though, remains cautious on the stock due to the recent margin disappointment and valuations, which are at the higher end during a cyclical peak.Of the 24 analysts who track the stock on Bloomberg, six have "Buy" recommendations whereas nine each divided between "Hold" and "Sell".Also Read: McKinsey likely to lay off nearly 2,000 employees in biggest job cuts round

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Escorts Kubota: The outperforming underperformer

By Yoosef K Feb 24, 2023 10:10:00 AM IST (Updated)

A curious case of Escorts Kubota whose shares have outperformed peers over the last six months, but earnings have consistently missed estimates. What is causing this optimism?

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Escorts Kubota: The outperforming underperformer

By Yoosef K Feb 24, 2023 10:10:00 AM IST (Updated)

A curious case of Escorts Kubota whose shares have outperformed peers over the last six months, but earnings have consistently missed estimates. What is causing this optimism?

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