ESC 190416 Antique IC

INDIA RESEARCH
INITIATING COVERAGE
AUTOMOBILES
16 April 2019
Escorts
Trifecta of a good harvest!
Powering the Dreams Ensuring Safety and Becoming the Preferred

of Farmers Comfort in Rail Transport Partner for Nation-building
Priya Ranjan Vikrant Gupta Apoorva Patil

+91 22 4031 3466 +91 22 4031 3429 +91 22 4031 3428
priya.ranjan@antiquelimited.com vikrant.gupta@antiquelimited.com apoorva.patil@antiquelimited.com
ANTIQUE STOCK BROKING LIMITED FROM THE RESEARCH DESK 16 April 2019 | 1
Reco : BUY INITIATING COVERAGE

CMP
Target Price
: INR786
: INR976
Escorts
Potential Return : 24% Trifecta of a good harvest!
We initiate coverage on Escorts Ltd (ESC IN), the fourth-largest tractor
Priya Ranjan manufacturer in India, with a BUY rating and a target price of Rs976; we
+91 22 4031 3466 believe it is likely to expand the addressable market for its products (crop
priya.ranjan@antiquelimited.com and application-specific) and expand its geographical footprint. In our view,
the company's medium-term goal of gaining ~15% domestic tractor market
Vikrant Gupta
+91 22 4031 3429 share and increasing exports volumes by ~2x by FY22e is broadly achievable
vikrant.gupta@antiquelimited.com with market-specific product strategies; additionally, its manufacturing and
product development tie-up with Kubota should fetch 8% volume growth
Apoorva Patil CAGR over FY19-22e. We are also positive on its railways component
+91 22 4031 3428 business and expect its wallet share in this business to increase as many of
apoorva.patil@antiquelimited.com
its products have the 'approved vendor' status by the railways. Although
moderation in tractor industry growth and challenging profitability in
construction equipment (CE) division will taper down its revenue and
earnings growth CAGR from that in the recent past, we expect the company's
Market data sustained focus on opex and its lean structure to help it weather any earnings
Sensex : 38,906 shocks (there might arise), unlike the case in the past tractor down cycle.
Sector : Automobiles
Market Cap (INRbn) : 96.4 Structural turnaround of tractor division alleviates earnings volatility linked to cyclicality
Market Cap (USDbn) : 1.394 ESC's tractor segment's (which is ~79% of revenue) outperformance (150bps market share
O/S Shares (m) : 122.6 gain) in the past three years has been a result of: (1) market and application focused new
52-wk HI/LO (INR) : 1019/541 product launches and dual brand strategy (Farmtrac and Powertrac), (2) achieving sustainable
Avg Daily Vol ('000) : 1,427 tractor segment margins vis-à-vis its peers, reflecting its market share, through cost rationalization,
Bloomberg : ESC IN and (3) divestment of non-profitable units. We believe greater focus on crop and market-
Source: Bloomberg specific products, distribution strengthening in weak territories (~9% volume share gain from
emerging territories over past five years), and greater participation in subsidy-linked volumes
Valuation
are likely to help ESC achieve its mid-term goal of achieving 15% market share. Higher
FY19e FY20e FY21e
exports volume will also provide cushion to any domestic market cyclicality. Our peak tractor
EPS (INR)* 55 63 70 industry volume analysis also suggests that ESC can achieve 1.6x volume without assuming
P/E 14.2 12.5 11.3 any share gains in the long term. We believe product development with Kubota can fetch
P/BV 2.3 2.0 1.7 share gains for the company in rice-growing states due to the latter's product superiority in
EV/EBITDA 11.7 10.2 9.3 those states.
Dividend Yield (%) 0.2 0.3 0.3
Railways business remains crown prince; CE business requires reorientation
Source: Bloomberg
We believe the railway component business (~6% of revenue) will remain the fastest-growing
Returns (%)
high-yielding segment of the company as it has a price advantage over MNC players as well
1m 3m 6m 12m
as enhanced safety and comfort-related product approvals from the railways (since the Indian
Absolute (2) 4 31 (17)
railways (IR) is focusing on its drive to reduce accidents, improve passenger comfort, and
Relative (4) (3) 18 (27) reduce import dependence. We estimate the railway component business revenue CAGR at
Source: Bloomberg
17.5 % between FY19-22e, driven by ramp-up in Coupler, BMBS, and other new products.
Shareholding pattern While we see a near-term upswing in CE business (15% of revenue), the sharp reversal of
low profitability is likely to remain elusive in the segment due to cut-throat competition and low
Promoters : 40% market share. We believe the CE business needs reorientation with the company's focus on
Public : 60% creating niches to improve profitability and segmental RoCE.
Others : 0%
Expect 13% earnings CAGR; initiate with a BUY and a target price of INR976 based on
Source: Bloomberg 14xFY21e EPS
Price performance vs Nifty We expect a revenue/EBITDA/PAT CAGR of 11%/12%/13% for ESC over FY19-FY22e,
driven by 10%, 13.5% and 17.5% tractor, CE and railways components revenue growth. We
140
120
expect EBITDA margin to improve by 40bps over FY19-22e, led by calibrated cost control,
100 improvement in CE margin, and higher tractor exports volume.
80 We believe tractor and CE segment margins are likely to improve by 20bps and 150bps to
60
14.4% and 3% respectively between FY19-22e, while railway equipment margin is likely to
Apr-18 Aug-18 Dec-18 Apr-19
improve by 150bps to 16.5%. Key risks: (1) sharp de-growth in tractor industry volume;
Escorts NIFTY (2) lack of improvement in CE segment margin.
Source: Bloomberg Indexed to 100;
* adjusted for treasury shares
Key investment arguments

We initiate coverage on Escorts (ESC) with a BUY rating and a target price of Rs976 due to
the company's expected addressable market expansion in all segments either through internal
product development/innovation or through forming JVs. We believe that (1) market expansion
of tractors division through product specializations (crop, application, and market-specific
products with Kubota tie-up) and deeper geographical penetration would help the company
achieve its goal of ~15% domestic tractor market share and double exports volumes by
FY22e, (2) there would be a 3x increase in the wallet share of its railway component business
since it could expand its product portfolio, given that some of its products now enjoy the
approved-vendor status from the railways, and (3) CE profitability would inch up through the
company's shift of focus to better-yielding products (post the Tadano JV). Although moderation
in tractor industry growth and challenging profitability in construction equipment division will
taper down its revenue/earnings growth CAGR from that in the recent past, we expect sustained
focus on opex and lean structure to help the company weather earnings shocks (if any arise),
unlike in the past tractor down cycles. We expect revenue/EBITDA/PAT CAGR of 11%/12%/
13% for ESC over FY19-FY22e. We value ESC at 14 PER to its FY21e earnings.
New product, qualitative channel expansion and exports to help outperform tractor industry
After a period of relative underperformance (FY11-16), when the company lost market share
of ~300bps,it has witnessed a clawback of ~150bps in the past three years on the back of
recent launches like paddy specialist tractors, compact tractors (Atom series), anti-lift tractors
and separation of channels for its dual brands, namely Farmtrac and Powertrac. We believe
Escorts will continue to outperform the industry in the medium term and certainly brush its
stated goal of 15% market share, gaining market share in all its segments with launches of
compact tractors in the <30HP segment, paddy specialist tractors in the 41-50HP segment,
and anti lift tractors (ALT) in the haulage segment.
Escorts gained ~150bps over FY16 - 19 Share of Powertrac increases post channel seperation
14% 13.2% 100
11.4% 11.6% 10.7% 11.8%
12% 10.4% 10.3% 10.8% 11.0% 38
80 48 45 42 40
10% 49
8% 60
6% 40
4% 55 58 60 62
51 52
20
2%
0% 0
FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY14 FY15 FY16 FY17 FY18 9MFY19
Escorts Market Share (%) Share of Powertrac (%) Share of Farmtrac (%)
Source: Company, Antique Source: Company, Antique
Share of opportunity markets increased by ~900bps

over FY14 - 19 Dealership network concentrated in Northern markets
120.0
West, 26.3%
100.0
18 19 22 24 26 27
80.0
North, 43.1%
60.0
40.0 82 81 78 76 74 74
20.0
- East , 18.6%
FY14 FY15 FY16 FY17 FY18 9MFY19
Strong Opportunity South, 12.0%

Given that Escorts derives ~32% of its volumes from the South and West regions as opposed
to the industry share of ~50% in these regions, we believe there is a significant opportunity to
increase the market share in these geographies and de-risk its geographical dependence on
the North and Central regions, which have so far been its strongholds. Our analysis of its
dealer network suggests it needs to improve since it currently has a dealer for every ~80,000
hectares of irrigated land vs. competitors like Sonalika with a dealer for every ~70,000
hectares of irrigated land. The weakness in channel is particularly pronounced in states like
Gujarat, Maharashtra, Tamil Nadu, Andhra Pradesh and Telangana.
Escorts is still a marginal player in exports (~3% share) with the bulk (~60-65%) being in the
+50HP range; we believe that lack of a suitable portfolio has clearly impacted the company's
volumes. However, with the launch of the new global tractors in the 70-90HP range (having
CRDi engines that are compliant with the latest global emission norms), there has been a
visible uptick in exports volume and we expect this trend to continue. We believe the recent
signing of the joint venture with Kubota is a step that would provide a boost to exports; it will
also give the company access to Kubota's global distribution network for exporting to selected
markets.
Also, our analysis of the past three major tractor sales upcycles suggests that, in the past 25
years, there has been a sales CAGR of ~15-17%, from bottom to peak, with each upcycle
lasting four years. Assuming that the current upcycle would also last four years, having
started in FY17, we believe, given the impetus from government's increased outlay on schemes
like Sub Mission on Agricultural Mechanization (SMAM) and in situ management of crop
residue in states of Punjab, Haryana, Uttar Pradesh and Delhi NCR to curb pollution, the
industry could see low to mid -single-digit growth in FY20e.
We expect Escort's tractor volumes to grow at an 8% CAGR over FY19-22e, outpacing the
industry growth, on the back of domestic volumes growing at 7% CAGR and exports at 23%
(although the latter is on a low base).
Tractor volumes to grow at 8% CAGR over FY19 - 22e Tractor revenues to grow at 10% CAGR over FY19 - 22e
140,000 26.2% 30.0% 70,000 22% 22% 25%
23.9%
120,000 25.0% 60,000 18%
20%
19.9%
100,000 50,000
20.0%
40,000 15%
80,000 10.9%
15.0% 9.8% 9.5%
60,000 30,000 10%
8.7%
7.7% 7.4% 10.0%
40,000 20,000
104,805
112,864
121,166
33,460
39,580
48,386
53,649
58,930
64,530
63,730
80,444
96,412
5%
20,000 5.0% 10,000
- 0.0% - 0%
FY17 FY18 FY19 FY20e FY21e FY22e FY17 FY18 FY19e FY20e FY21e FY22e
Total Volumes (Units) YoY Growth(%) Revenues (INR Mn) YoY Growth(%)

Increase in road construction pace and government's infra push bodes well for CE business
The construction equipment (CE) industry is highly cyclical in nature, given its dependence on
infrastructure capex. Moreover, the industry has recorded a CAGR of ~11.5% over FY05-18
(a decline from FY12-15 but with a rebound over the past three years, given the government's
focus on roads, railways, and metros). Escorts derives ~15% of its revenues from the CE
business; we expect this segment to post a revenue CAGR of 13.5% over FY19-22e on the
back of (a) a pick-up in road tendering by NHAI and MORTH, which has risen to ~20k km in
FY19 (~10k km in FY16) and provides demand visibility to ESC's key products - pick and
carry cranes, road compactors and backhoe loaders; - two-thirds of total CE demand depends
on government orders, (b) launch of 4WD backhoe loaders with improved power, fuel
efficiency, and productivity to gain share in backhoe loaders (40% of the CE industry and 2%
ESC market share), (3) addressable market expansion in the crane segment (9% of CE) since
the company may enter the high-margin slew crane segment and high-end TRX cranes market
through the Tadano JV. Escorts is the largest player in the low-margin hydra crane segment
(which is 67% of the crane market) with a 40% market share.
Railways business' (6% of revenue) addressable market to increase 3x in the next 3-4 years
We believe that the railways business (~6% of revenue) will continue to be ESC's fastest-
growing segment since it has received qualified vendor status approval for additional
components by IR (as the railways is focusing on accident reduction, increase in passenger
comfort, and reducing import dependence, and thereby costs, by sourcing locally. The
company's current order book stands at a lifetime high of ~INR4.5bn, which it expects to
execute over the next 6-12 months. Escorts, so far, has enjoyed an approved vendor status for
parts like hydraulic dampers, couplers, air suspension control equipments, electro pneumatic
brakes, and compressed air braking equipment, along with global majors like Knorr Bremise,
Faiveley and Westinghouse, while it has got a developmental vendor approval for new
products like Bogie mounted brake systems, axle-mounted disc brakes, brake pads, etc. We
believe that, with additional products gaining the unconditional vendor status, the company's
railways addressable market would increase 3x over the next 3-4 years.
We forecast a 11% CAGR in revenues for Escorts over FY19-22e driven by a 10% CAGR in
tractor revenues (8% CAGR in tractor volumes and 2% improvement in average selling prices)
led by domestic industry outperformance and export volumes nearly doubling. We expect
EBITDA margins for Escorts to expand by ~40bps to 12.3% over FY19-22e led by rationalization
of manpower costs, improvement in construction equipment margins with higher proportion of
high end cranes and ramp up of higher margin export volumes in the tractor segments. We
expect Escorts to post an earnings CAGR of 13% over FY19-22e. Escorts is expected to
generate cumulative OCF of ~INR17.7bn over FY19-22e with cumulative capex over the
same period to be ~INR7bn primarily consisting of ~INR3bn in FY20e towards the Kubota JV.
Given the strong OCF generation, Escorts will be able to fund its capex requirements through
internal accruals. We expect Escorts to continue to maintain its net cash position.
Valuation table
P/E (X) EV/EBITDA (X) RoE(%) EPS
CAGR (%)
CMP TP Return Reco Market FY19e FY20e FY21e FY19e FY20e FY21e FY19e FY20e FY21e FY19-21e
Cap
(USD BN)
Domestic OEMs
Maruti Suzuki 7,336 5,305 -27.7 SELL 32.0 28.2 25.7 24.9 18.3 16.4 15.3 17.9 17.8 16.9 6.5
Mahindra & Mahindra 683 961 40.7 BUY 12.2 17.9 14.8 14.7 12.0 9.8 9.7 13.6 14.8 13.4 10.2
Bajaj Auto 3,034 3,258 7.4 BUY 12.6 20.5 18.5 16.8 14.4 12.7 11.2 20.1 20.0 19.7 10.5
Eicher Motors 21,323 25,059 17.5 BUY 8.4 24.9 20.7 19.3 17.0 14.5 11.8 28.6 27.3 24.0 13.7
Tata Motors 231 240 4.1 BUY 9.8 (128.7) 14.8 11.6 4.1 2.7 2.4 (30.3) 5.3 6.4 NA
Hero MotoCorp 2,701 2,251 -16.7 SELL 7.6 16.0 15.3 18.0 9.4 8.9 10.3 26.5 25.5 20.9 -5
Ashok Leyland 96 100 4.6 BUY 4.1 14.8 13.5 20.3 8.0 6.6 9.0 22.7 21.8 13.8 -10
TVS Motors 504 599 18.8 BUY 3.4 33.6 24.2 21.0 15.5 11.9 10.5 21.7 25.3 24.6 26
Escorts 786 976 15.3 BUY 1.4 14.2 12.5 11.3 11.7 10.2 9.3 15.9 15.7 15.0 12.3
Atul Auto 339 422 24.4 BUY 0.1 14.7 12.3 12.1 9.7 8.1 7.7 21.7 22.2 19.4 10.4
Global Tractor OEMs *
John Deere 161 NA NA NA 51 14.3 12.6 11.6 10.5 9.6 9.5 28.8 27.0 25.4 7.0
Caterpillar 141 NA NA NA 79.9 11.4 10.7 10.3 6.6 6.8 6.6 42.2 37.6 32.0 5.0
Kubota 1,620 NA NA NA 17.5 13.2 12.6 11.9 10.2 9.8 9.3 10.5 10.3 10.0 5.4
AGCO 72 NA NA NA 5.5 15.3 13.3 12.4 7.6 7.0 6.7 11.4 11.8 10.6 11.0
Source: Bloomberg; * CMP is in local currency
5 year average PE is 12x 5 year average EV/EBIDTA is 10x

25.0 35.0
30.0
20.0
25.0
15.0 20.0
15.0
10.0
10.0
5.0
5.0
0.0 -
Dec-14
Dec-15
Dec-16
Dec-17
Dec-18
Oct-14
Jul-14
Jan-15
Oct-15
Jul-15
Jan-16
Oct-16
Jul-16
Jan-17
Oct-17
Jul-17
Jan-18
Oct-18
Jul-18
Jan-19
Apr-14
Aug-14
Apr-15
Aug-15
Apr-16
Aug-16
Apr-17
Aug-17
Apr-18
Aug-18
Apr-19
Apr-14
Apr-15
Apr-16
Apr-17
Apr-18
Apr-19
P/E(x) Average P/E(X) +1 S.D -1 S.D EV/EBITDA(x) Mean +1 S.D -1 S.D
Escorts trades at 11xFY21e earnings and 5 year average of 12 x forward earnings, significant
discount to other domestic OEMs, and in line with global peers. We value Escorts at 14x
FY21e earnings, at a slight premium to global peers on the back of a better earnings growth
profile.
Key risks
The tractor industry volume growth has a high correlation with the deviation of monsoons
from their long-term average. Any significant deviation resulting in weak monsoons could
lead to a sharp decline in the industry's growth.
Weak reception to new product launches like compact tractors and paddy specialists. A
slower-than-expected channel ramp-up in opportunity markets of South and West could
lead to lower-than-expected volume growth.
The construction equipment industry is highly dependent on government spending, which
accounts for two-thirds of the demand. A slowdown in order execution or additional
ordering could impact demand and, thereby, profitability for the segment.
Lower-than-expected spending by the government in railways and delays in getting
approvals for its new products like Bogie-mounted brake systems, axle-mounted disc
brakes, etc., could impact growth of the railway business in the long term.
A sharp decline in tractor margins due to a significant slowdown in tractor demand
resulting in higher industry discounting and adverse operating leverage.
JVs with Tadano and Kubota may not yield the desired result and cultural differences
between both the teams may delay execution.
Expect further tractor market share gains on targeted product approach/

focus
Escorts has been investing in products since FY11, with a lead development time of ~18-30
months for products to be commercially available in the market; as there were limited launches
from FY11-16, it led to a market share loss of ~290bps during the period.
The only notable launches from FY11-14 were two sub-30HP tractors under the Powertrac
and Farmtrac brands. However, with a stronger focus on investments in products, R&D spending
increased from ~0.8% of sales in FY10 to ~3% of sales in FY17, leading to a steady stream
of launches from 3QFY15 across segments and applications.
Post new product launches targeted at market and crop-specific applications, ESC has gained
100bps market share from FY16 to FY19. This buttresses our belief that the company's product
and market learning has improved significantly in the past few years. We believe that the
recent and upcoming launches will help it gain additional market share from opportunity
markets, while maintaining its share in the strong northern markets.
R&D expenditure increases post FY11 Leading to new launches from FY15 and gain in market share
3.5% 3.2% 14% 13.2%
11.8%
3.0% 11.4% 11.6%
12% 10.7% 10.4% 10.3% 10.8% 11.0%
2.4%
2.5% 2.3% 10%
1.9%
2.0% 1.6% 8%
1.5% 1.2% 6%
1.0%
1.0% 0.8% 4%
0.5% 2%
0.0% 0%
FY10 FY11 FY12 FY14 FY15 FY16 FY17 FY18 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19
R&D Expenditure (% of Net Sales) Esc orts Market Share (%)
Increase focus on R&D leads to new launches from FY15

Category HP Farmtrac/Powertrac Model Launch month/Year
Compact Tractors <30 Farmtrac 22-28HP Q2FY18
Personnel Tractors 31-40 Powertrac Powertrac Euro 37 Q1FY16
31-40 Powertrac Powertrac Euro 31 Q1FY16
XP Series 31-40 Farmtrac Farmtrac XP37 Q3FY15
31-40 Farmtrac Farmtrac XP41 Q3FY15
Anti Lift Tractors 31-40 Powertrac ALT Powertrac ALT 3500 Q4FY15
41-50 Powertrac ALT Powertrac ALT 4000 Q4FY15
Personnel Tractors 41-50 Powertrac Powertrac Euro 45 Q2FY16
41-50 Powertrac Powertrac Euro 50 Q2FY16
Classic Series 41-50 Farmtrac Farmtrac Classic 45 Q2FY16
41-50 Farmtrac Farmtrac Classic 60 Q2FY16
41-50 Farmtrac 6055 T20 Classic Q3FY17
Personnel Tractors 50+ Powertrac Powertrac Euro 60 Q2FY17
Classic Series 50+ Farmtrac Farmtrac 6055 Classic Q3FY16
Executive 50+ Farmtrac Farmtrac 6050 Q3FY15
50+ Farmtrac Farmtrac 6050 4X4 Q3FY15
50+ Farmtrac Farmtrac 6055 Q4FY15
50+ Farmtrac 6065 Executive Series Q3FY17
Heritage Series 50+ Farmtrac Farmtrac Heritage series Q3FY15
(6050,6060,6075)
Source: Company, Antique
Escorts, much like the other major players M&M (with brands Mahindra and Swaraj) and
TAFE (with brands TAFE and Eicher), also has two brands in its portfolio, namely Farmtrac
and Powertrac.
Earlier, it had a common distribution network for both the brands, with both being showcased
in the same showrooms. However, starting FY17, it has separated the distribution network for
both, particularly in the strong North and Central markets like UP, Bihar, MP, Rajasthan, and
Haryana. This has led to a focused selling of both the brands, which in turn has led to market
share gains.
Farmtrac traditionally operated in the >41HP segment and is a premium product (dry land
applications) while Powertrac operated in the < 41HP segment and is a mass offering (wet
land applications). Over FY15-18, Escorts began to extend the two brands with the launch of
Farmtrac XP series (31-40HP) in FY15 and Powertrac Euro Series (41-50HP) from FY16-17 to
plug whitespaces in the product portfolio of the respective brands.
Innovative products like the anti-lift tractors (ALT) were launched under the Powertrac brand in
the 31-40HP category as well as the Farmtrac T20 Classic in the 41-50HP segment were
added to the portfolio. The ALT tractors are primarily targeted at the haulage segment; these
are being marketed in specific areas where the gradience of the path leads to tractors
toppling easily - such as mining areas and river beds. While the ALT is currently selling ~300
units/month, the company aims to sell up to ~600 units/month, given the strong underlying
demand for these. The T20 classic is again an innovative product that allows farmers to shift
to lower power modes, reducing heavy-duty work and saving on fuel.
The company's recent launches (at the end of FY18) include the Atom series of compact
tractors (meant for vineyards and orchards) in the <30HP segment and paddy specialist in
the 41-50HP segment. Both these products have been introduced primarily for the markets of
South and West and are currently in the ramp-up stage. The current run-rate of Atom is ~60-
70 units/month and this is expected to be ramped up to ~250 units/month in FY20e, which
could be the demand at that time. Again, the paddy specialist is currently selling ~50-60
units/month and the company expects to ramp this up to ~250-300 units/month in FY20e.
Launch of Atom brand leads to gain in market share Farmtrac XP/Champion & ALT tractors leads to gain in market share
3.8 20.0
4
3.5
15.1
14.3 14.3 14.5
3 15.0 13.1 12.6
2.1
1.9
2 10.0
1.0
1 0.8 5.0
- -
FY14 FY15 FY16 FY17 FY18 9MFY19 FY14 FY15 FY16 FY17 FY18 9MFY19
Share in <30HP(%) Share in 31-40HP(%)

New Paddy specialist to help win back share... ... > 50 HP category sees a dip
15.0 12.0
11.7 9.7
10.9 10.0
10.7 10.4 10.2 7.9
9.7
10.0 8.0 6.9
6.4
6.0
5.6
6.0
5.0 4.0
2.0
- -
FY14 FY15 FY16 FY17 FY18 9MFY19 FY14 FY15 FY16 FY17 FY18 9MFY19
Share in 41-50HP(%) Share in >50HP(%)
Escorts has learned from past market share loss

The Indian tractor industry is essentially dominated by five major players, accounting for
~94% of industry volumes in FY18. The industry has over the years seen consolidation with
M&M acquiring Punjab Tractors and TAFE acquiring Eicher in 2009 and 2005 respectively.
With the acquisition of Punjab Tractors, M&M has emerged as a clear market leader and,
over the years, has maintained a stable market share in the range of 40-42%.
In the past three years, TAFE has ceded market share to M&M, Escorts, and John Deere.
Escorts has lost ~300bps of market share from FY11-16, which dropped to 10.3% in FY16
from the peak of ~13-14% at the start of the decade. The decline was broad-based across
geographies with the company losing total market share in the range of ~100-450bps; its
stronghold of North lost ~450bps of market share, dipping to a low of 15.4%
We attribute the loss in market share to three key reasons:
Underinvestment in products
Common distribution channel for its two brands Powertrac and Farmtrac in North
Outperformance of its weaker markets like South and West
Escorts and John Deere gain market share at cost of TAFE over the last three years
120.0
100.0 7.3 7.7 7.5 7.3 7.5 7.4 6.4 6.2 7.7
8.0 7.4 5.7 5.9 5.3 6.1 7.6 8.7 8.9
80.0 8.6 8.3 9.6 10.3 12.0 11.9 11.9 12.1 11.9
13.2 11.4 11.6 10.7 10.4 10.3 10.8 11.0 11.0
60.0
20.7 23.4 25.0 24.8 24.4 23.0 20.5 19.1 18.7
40.0
20.0 42.2 41.8 40.6 41.0 40.3 41.3 42.8 42.2 41.8
-
FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 9MFY19
M&M TAFE Escorts Sonalika John Deere Others

Channel expansion in opportunity markets

Escorts has a relatively-skewed geographical mix compared to the industry's, deriving a
substantial proportion of its volumes from North (~51%) vs. the industry (~34%). As compared
to other major tractor players like M&M, TAFE, and Sonalika, which largely mirror the industry
geographical mix, Escorts relies heavily on the North. In fact, the share of key markets like
South and West is ~32% for Escorts vs. the industry at ~50% (for these regions). This leaves
Escorts with an opportunity to gain market share in these opportunity markets of South and
West through improving its distribution network.
Escorts derives ~32% of volumes from South & West While the industry derives ~50% of volumes from South & West
West, 26
West, 30
North, 34
North, 51
East , 16
East, 16
South, 7 South , 20
Although Escorts has managed to claw back ~70bps of market share over FY16-18 with
gains in North, East, and West, the relative underperformance of its key stronghold of North
vis-à-vis South has hampered the gains.
Over FY15-18, North lost ~530bps of volume share, almost exclusively to the South, with the
latter turning out the best performer in the past three years, growing at a CAGR of 21% (as
opposed to the North growing at ~ 4% and East and West growing by 14.7% and 6%
respectively). Although Escorts has managed to maintain its market share in South at ~3.5-4%
over the past three years, given that the contribution of South is only ~7-8% to the company's
volumes, it has not yet had a meaningful impact on the company's overall growth rate.
Farmtrac/Powetrac separation leads to share gains Launch of paddy specialist , channel expansion to aid market share
25.0 6.0
5.1
20.0 4.8
5.0 4.6
20.0 4.1 4.2
17.2 16.5 16.4 4.0
16.3 15.8 3.7
15.4 15.4 4.0 3.6
15.0
3.0
10.0
2.0
5.0 1.0
- -
FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18
Share in North(%) Share in South(%)

Launch of atom tractors leads to market share gains Steady performance in east continues
12.0 11.2 14.0
12.3
11.5 11.2 11.5
9.4 12.0 10.6 10.5
10.0 9.0 9.0
8.3 8.7 9.9 9.7
7.9 10.0
8.0 7.5
8.0
6.0
6.0
4.0
4.0
2.0 2.0
- 0.0
FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18
Share in West(%) Share in East(%)
The launch of new compact tractors in sub <30HP segment and paddy specialist in the 41-
50HP segment will position the company better in the markets of South and West. Escorts has
identified opportunities in markets like Southern Gujarat, Western Maharashtra, AP, Telangana,
Karnataka, Tamil Nadu and West Bengal, where it is trying to increase its market share from
the current single-digit level. Growing market share in these zones is critical not only from the
perspective of outperforming the industry but also to de-risk the business in terms of
overdependence on one particular geographical zone. It has been taking a selective approach
towards channel expansion with the focus not on flooding uncovered districts with dealers but
rather identifying potential districts and nurturing financially strong dealers which can invest
in its brand. This helps in allowing it to better channel its resources for training and support
services as well as in maintaining dealer's financial viability.
Dealership network comparison

No of Dealerships Irrigated Hectares per Dealer % of Overall Dealerships % Share
Escorts Sonalika Escorts Sonalika Escorts Sonalika in All India Sales
AP+ Telangana 49 62 108,163 85,484 5.7% 6.3% 10.8%
Bihar 79 89 37,127 32,955 9.2% 9.1% 6.1%
Chattisgarh 31 32 47,161 45,688 3.6% 3.3% 2.7%
Gujarat 45 66 94,067 64,136 5.3% 6.7% 6.9%
Haryana 61 43 48,049 68,163 7.1% 4.4% 5.1%
Karnataka 28 53 127,000 67,094 3.3% 5.4% 5.1%
Madhya Pradesh 114 108 82,939 87,546 13.3% 11.0% 10.3%
Maharasthra 56 110 58,000 29,527 6.5% 11.2% 10.3%
Orissa 20 26 62,250 47,885 2.3% 2.7% 2.9%
Punjab 30 43 138,100 96,349 3.5% 4.4% 2.9%
Rajasthan 82 98 93,293 78,061 9.6% 10.0% 9.1%
Tamil Nadu 20 28 133,950 95,679 2.3% 2.9% 3.8%
Uttar Pradesh 174 172 80,460 81,395 20.4% 17.5% 16.1%
West Bengal 21 18 147,571 172,167 2.5% 1.8% 3.0%
Others 45 33 46,667 63,636 5.3% 3.4% 5.0%
All India 855 981 79,572 69,352 100% 100% 100%
On comparing the distribution network of Escorts (11% volume share) and its peer Sonalika
(12% volume share), we find that the difference is almost wholly explainable by the latter's
superior distribution network. Both these players have an average annual dealer sale of ~90
units, with Sonalika having a better penetration with a dealer for every ~69,000 hectares of
irrigated land as compared to Escorts, which has a dealer for every ~79,000 hectares. Key
states like AP, Telangana, Gujarat, Karnataka, Maharasthra, Tamil Nadu and West Bengal,
which contribute ~40% to industry volumes, are significantly underpenetrated and present a
good opportunity for channel and product expansion. We believe that purely on a network
catch-up with peers like Sonalika, Escorts has the potential to gain ~100bps of market share,
assuming the current run-rate of average annual dealer sale.
Kubota joint venture to open up large export opportunity
The Indian tractor export industry stood at ~85,000 units in FY18 and has grown at CAGR of
~7% over the past decade. However, Escorts witnessed a decline with current volume of
~1,970 units as opposed to ~2,840 units in FY08. It has seen its volume share in exports dip
by ~420bps over the past decade and stands at ~2.3% currently. With the bulk of exports
(~60-65%) being in the +50HP range, lack of a suitable portfolio clearly impacted the
company's volumes. However, with the launch of the new global tractors in 2QFY18 in the
70-90HP range (which have CRDi engines and are compliant with the latest global emission
norms), there has been a visible uptick in volumes. Exports are likely to increase by 50% in
FY19 to ~3,000 units albeit on a low base. We expect exports to continue their positive
momentum and grow to ~8,300 units by FY22e. The company has a target to sell ~8,000-
10,000 units for its exports.
Expects share in industry exports to increase to ~5% by FY22e

140,000 6.5 7.0
5.7
120,000 6.0
5.0
4.7
100,000 4.3 5.0
4.0
80,000 3.3 4.0
2.9
60,000 2.3 2.3 3.0
2.1
40,000 1.5 1.3 2.0
1.1 1.0
106,963
114,450
43,553
38,198
37,622
62,872
70,772
63,147
62,677
75,376
77,461
78,351
84,932
93,425
99,965
20,000 1.0
- 0.0
FY08 FY10 FY12 FY14 FY16 FY18 FY20e FY22e
Industry Exports(Units) Escorts Market Share(%)
We believe the recent signing of the joint venture with Kubota is a step in the right direction to
provide a boost to exports. The joint venture is essentially a manufacturing facility with a
capacity of 50,000 units per annum to become operational by FY21e. It entails an investment
of ~INR3bn with Escorts holding a 40% equity stake with an investment of ~INR1.2bn with
the remainder contributed by Kubota. The capacity available for Escorts will be ~30,000
units, while it will be ~20,000 units for Kubota.
The key reasons for the joint venture are:
Joint development of new products for both Indian and export markets that are likely to
get introduced starting from FY22e.
Sharing of costs for capacity expansion keeping in the mind the cyclical nature of the
tractor industry.
Kubota will be able to establish a low-cost manufacturing base in India, with access to
Escort's supplier base and higher production volumes through Escort's contribution.
Escorts will gain access to Kubota's global distribution network for exports to selected
markets.
Agri Machinery Business: revenues likely to grow at a CAGR of 10% over FY19-22e
We expect Escorts' agri machinery revenue to grow at a CAGR of 10% with domestic volume
CAGR of 7% and exports CAGR of 23%.
Market and application focused product launches: Escorts, after a period of
relative underinvestment in its products, had ramped up its R&D spending and launched
multiple products across segments. Innovative products like the anti-lift tractors (ALT) were
launched under the Powertrac brand in the 31-40HP category as well as the Farmtrac
T20 Classic in the 41-50HP segment were added to the portfolio. The recent launches
(end of FY18) include the Atom series of compact tractors (meant for vineyards and
orchards) in the <30HP segment and paddy specialist in the 41-50HP segment. Both
these products have been introduced, primarily for the markets of South and West and
currently in the ramp-up stage.
Channel expansion in the opportunity market of South and West: Escorts
has a relatively-skewed geographical mix as compared to the industry's deriving a
substantial proportion of its volumes from North (~51%) vs. the industry's (~34%). In fact,
the share of key markets like South and West is ~32% for Escorts vs. the industry's at
~50%. This leaves the company with an opportunity to gain market share in its opportunity
markets of South and West through improving its distribution channel and network. Also,
the separation of the channels for the two brands PowerTrac and Farmtrac has yielded
rich dividends in terms of market share gain in the North Zone
Significant untapped opportunity in exports: Escorts currently has a ~3% market
share of exports and, with the introduction of the launch of the new global tractors in
2QFY18 in the 70-90HP range (which have CRDi engines and are compliant with the
latest global emission norms), there has been a pick-up in volumes seen in FY19, which
are expected to grow 50% YoY in FY19. We believe exports could grow at a 23% CAGR
over the next three years on the back of penetration into newer markets like LATAM,
ASEAN, and Europe though better distribution channels and new product portfolios.
Also, the signing of JV with Kubota is expected to open up access to the latter's distribution
network for exports to selected markets.
Domestic tractors to grow at CAGR of 7% over FY19 - 22e Export tractors to grow at CAGR of 23% over FY19 - 22e
140,000 30.0% 7000 91.2% 100.0%
25.2%
23.7% 90.0%
120,000 25.0% 6000
80.0%
100,000 18.9% 5000
56.7% 70.0%
20.0%
80,000 4000 60.0%
15.0% 36.2% 50.0%
60,000 3000 30% 40.0%
8.0% 25%
7.0% 7.0% 10.0%
40,000 2000 30.0%
15%
100,789
107,844
115,393
62,699
78,473
93,323
20.0%
3,089
4,016
5,020
5,773
20,000 5.0% 1000

1031
1971
10.0%
- 0.0% 0 0.0%
FY17 FY18 FY19 FY20e FY21e FY22e FY17 FY18 FY19 FY20e FY21e FY22e
Domestic Trac tor Volumes (Units) YoY Growth(%) Export Volumes(Units) YoY Growth(%)

Overall tractors to grow at CAGR of 8% over FY19 - 22e Revenue to grow at CAGR of 10% over FY19 - 22e
140,000 26.2% 30.0% 70,000 22% 22% 25%
23.9%
120,000 25.0% 60,000 18%
19.9% 20%
100,000 50,000
20.0%
80,000 40,000 15%
10.9%
15.0% 9.8% 9.5%
60,000 8.7% 30,000
7.7% 10%
7.4% 10.0%
40,000 20,000
104,805
112,864
121,166
63,730
80,444
96,412
33,460
39,580
48,386
53,649
58,930
64,530
5.0% 5%
20,000 10,000
- 0.0% - 0%
FY17 FY18 FY19 FY20e FY21e FY22e FY17 FY18 FY19e FY20e FY21e FY22e
Total Volumes (Units) YoY Growth(%) Revenues (INR Mn) YoY Growth(%)
Agri-machinery EBIT margin to remain stable over FY19-22e

Historically, Escorts has had a higher cost structure than competitors but it has, over the years,
been able to rationalize it, both at the contribution margin level as well as the fixed expense
one. We have analyzed the company's cost structure vs. peers' (Sonalika, TAFE, and M&M)
and found that its agri EBIT margins lag peers' by ~400-1,000bps due to higher raw material
costs and employee expenses. Its employee costs are ~8-9% of net sales vs. 5-7% for peers.
Escorts has a legacy labor force and a higher proportion of permanent employees than
peers. We expect the EBIT margin to remain broadly stable over FY19-22e .
Tractor EBIT margin to remain stable over FY19-22e

16.0% 14.4% 14.4% 14.4%
14.2%
13.6%
14.0%
12.0% 10.3%
10.0%
8.0%
6.0%
4.0%
2.0%
0.0%
FY17 FY18 FY19e FY20e FY21e FY22e
EBIT Margins (%)

Agri EBIT margin lags behind peers due to higher employee and raw material costs
FY14 FY15 FY16 FY17 FY18
EBIT Margin (%)
Sonalika 21.3 20.7 23.9 25.2 NA
M&M 17.1 14.7 16.3 19.0 19.6
TAFE 15.6 12.2 14.2 14.6 NA
Escorts 9.7 7.2 8.1 10.3 13.6
Raw Material Costs (% of sales)

Sonalika 65.6 66.2 62.8 62.6 NA
TAFE 67.9 66.8 67.3 66.4 NA
Escorts 71.7 71.5 69.4 68.2 67.2
Employee Costs (% of sales)

Sonalika 3.8 4.2 5.3 5.6 NA
TAFE 4.9 5.5 6.6 7.1 NA
Escorts 10.7 11.6 11.9 9.5 8.6
Low mechanization levels leave ample room for tractor industry growth
The domestic tractor industry has grown at 6.5% CAGR over the past 25 years to reach a size
of ~5.2mn units (assuming a replacement cycle of 10 years) with a run-rate of ~712k units
achieved in FY18. Despite this steady expansion, mechanization levels still remain extremely
low in India with only ~6% of the ~90mn agricultural households owning a tractor. Based on
current MSPs and crop yields, we estimate that there are ~12mn households having a land
holding in excess of ~5 acres, which is the minimum land holding required to afford a tractor.
Given that only ~40% of eligible agricultural households own a tractor, there is sufficient
room for the industry to expand. We believe that the tractor industry could still maintain a
long-term growth of ~6% until it peaks at ~1.5mn units by FY32.
Minimum land holding of ~5 acres is required to own a tractor

Paddy
Yield (Kg/Hectare) 3,300
Procurement Price (INR/Quintal) 1,770
Cost of Production (INR/Quintal) 1,180
Income (INR) 6,784
Wheat
Yield (Kg/Hectare) 4,200
Procurement Price (INR/Quintal) 1,840
Cost of Production (INR/Quintal) 1,227
Income (INR) 8,976
Income per Cropping (INR) 7,880

No of Croppings per year 2.0
Total Agricultural Income per year (INR) 15,760
Annual Household Income (INR) 32,832
Monthly per capita Expenditure in Rural Areas (INR) 1,400

Family Size 4
Household per Capita Expenditure in Rural Areas (INR) 5,600
Annual Household Expenditure in Rural Areas (INR) 67,200
Annual Tractor EMI (INR) 106,773
Total Annual Expenditure (INR) 173,973
Minimum Land Size Required (acres) 5.3
Source: CACP, NSSO, Antique Estimates
% of Land holdings by size (Hectares)

1-2(ha), 17.1%
2-4(ha), 9.4%
.4-1(ha), 34.9%
4-10(ha), 3.7%
>10(ha), 0.4%
<.01 (ha), 2.6%
.01-.4 (ha),
31.9%
Structural drivers remain in place to maintain historical growth trajectory

Tractor volumes have grown at CAGR of 6.7% over the last 26 years
900
787
712
800
634
583
700
551
537
528
493
482
600
403
500
319
303
306
400
264
255
261
250
236
228
218
215
189
181
300
172
164
145
141
200
100
-
FY93
FY95
FY97
FY99
FY01
FY03
FY05
FY07
FY09
FY11
FY13
FY15
FY17
FY19
Trac tor Sales ('000 units)
Source: Industry, Antique
Given that tractor sales are highly cyclical and depend to a large extent on the state of
monsoons in any particular year, it is difficult to predict their YoY growth. However, we believe
that the structural drivers (such as the ones listed below) for long-term growth to maintain its
historical trajectory of ~6% YoY growth remain in place:
Low mechanization levels
Increasing crop realizations
Rise in crop yields and irrigated land
Credit availability
Shortening of replacement cycles and
Increased usage in non agricultural activities (haulage and construction)
Paddy MSPs have increased at a CAGR of ~7% Wheat MSPs have increased at a CAGR of ~6.5%
2,000 2,000 1,840
1,770
1,800 1,800 1,625
1,590 1,525
1,600 1,450 1,510 1,600 1,400 1,450
1,345 1400 1,284 1,350
1,400 1,230 1,400
1,126 1,170
1,200 1,200
980 1,030
1,000 1,000
800 800
600 600
400 400
200 200
- -
FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19
Paddy MSP (INR/Quintal) Wheat MSP (INR/Quintal)
Source: CACP Source: CACP
Food grain yields have grown at a CAGR of ~2.5% However yields still lag behind peers
5,891
2,947 7,000
2,889
2,832
5,095
4,894
2,777
4,640
4,617
6,000
2,620
2,900
3,801
3,637
3,637
3,581
5,000
2,471
3,317
3,144
3,129
2,700
3,033
3,000
2,960
2,331
2,747
4,000
2,200
2,183
2,500
2,151
2,075
3,000
2,020
1,983
1,980
2,300
1,968
1,903
2,100 2,000
1,753
1,900 1,000
1,700 -
Cambodia
Pakistan
Myanmar
Nepal
Indonesia
Mexico
China
Sri Lanka
Thailand
Malaysia
India
Brazil
Philippines
South
Bangladesh
Bhutan
1,500
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
Cereal Yields (Kg/Hectare)
Source: Ministry of Agriculture Source: World Bank
50% of net sown area remains unirrigated Capex on irrigation growing at a CAGR of ~17%
90 81 1,200 1,118
80 69 72
65 946
70 59 58 1,000
60 53 54 833
50 44 43 41 800 711
39 646
40
30 600 507
16 16
20
10 0 400
0
UP
MP
TN
Odisha
Punjab
Rajasthan
Telangana
Chhattisgarh
Haryana
Karnataka
Maharashtra
200
Gujarat
WB
AP
Bihar
-
FY14 FY15 FY16 FY17 FY18 FY19e
Unirrigated Net Sown Area(%) All India Average(%) Capex on Irrigation (INR Bn)
Source: Ministry of Agriculture Source: Union Budget

Tractor industry growth to be driven by un-matured states

South & East have gained ~830bps of market share from FY15 - 18
120.0
100.0
27.6 25.5 30
32.7
80.0
10.2 13.8
60.0 13.4 16
19.8 18.7
14.3 20
40.0
20.0 42.4 41.9 39.7 34
-
FY05 FY10 FY15 FY18
North(%) South(%) East(%) West(%)
Source: Industry Data
The tractor industry in the Northern markets, which has historically dominated, particularly in
Punjab and Haryana - the states that benefitted the maximum from the green revolution of the
1970s, has lost share to West, East and South now. This decline has been particularly
pronounced over the past three years with North and West losing ~530bps and ~260bps of
market share and East and South gaining ~530 bps and ~220bps respectively.
Punjab, Haryana and Gujarat have high tractor penetration levels

20% 18%
16% 15%
12%
12%
9%
8%
6%
4% 3%
0% 0%
MP
UP
TN
Chattisgarh
Haryana
Punjab
Rajasthan
AP+Telangana
Maharashtra
Karnataka
Orissa
Gujarat
Others
WB
Bihar
HH P enetratio n(%) Sales CA GR FY08-18(%)
A ll India HH P enetratio n (%) A ll India Sales CA GR FY08-18(%)
Of the 14 states that constitute ~95% of the annual sales volumes, penetration levels vary
widely with North and West being relatively mature states compared to South and East.
States like Punjab, Haryana, Gujarat, and MP, which were the major beneficiaries of the
green revolution, enjoy generally higher farm incomes on the back of better crop yields and
irrigation coverage. These have driven penetration levels in the range of ~10-15%, higher
than the national average of ~6%, with demand now coming through largely on the back of
replacements.
However, states like AP, Maharashtra, UP, Bihar, and Orissa have lagged behind the national
average. Given that the relatively mature states have, to a large extent, realized their potential
in terms of irrigation infrastructure, yields and cropping intensity, it can be seen that sales
growth also over the past ten years has dipped below the national average of ~9% over
FY08-18 with Punjab and Haryana growing in the range of 1-5%. Similarly, relatively
underpenetrated states, particularly in the East like West Bengal, Orissa, UP, and Bihar, have
outperformed the national average and grown in double digits. We expect this trend of
outperformance in these states to continue as mechanization levels converge with the national
average.
Structural shift towards higher horsepower tractors to continue

Share of 41HP + has increased by ~1500bps over FY11 - 19
100
12.3 12.5 5.5 4.9 6.0 6.7 7.1 7.5 7.3
90
80
27.3 26.7 45.4
70 48.7 46.5 45.9 48.9 47.2 47.5
60
50
40 45.6 45.5
30 36.5 35.2 36.7 36.6 35.8
34.7 36.0
20
10 14.8 15.3 12.6 11.2 10.9 10.8 9.3 9.5 9.2
-
FY11 FY13 FY15 FY17 9MFY19
<30HP(%) 31-40HP(%) 41-50HP(%) >50HP(%)

The Indian tractor industry has already undergone and is still undergoing a structural shift
towards high HP tractors from medium ones. Over the past eight years, the market share of
high HP tractors (41HP+) has increased by ~1,500bps with the earlier mainstay segment of
31-40HP losing ~950bps of market share. This shift towards higher horsepower tractors can
be attributed to multiple factors, namely:
Rising affordability for farmers.
Greater focus on productivity leading to higher usage of implements which need higher
horsepower tractors as a power source.
Need for higher horsepower tractors for harvesting applications and in hard soil conditions.
Increased usage in non agri segment such as infrastructure and construction.
Can the cycle extend to FY20e?

Our analysis of the sales data for the past 25 years suggests a strong correlation of volume
growth with deviation of monsoons from their long-term average. There have only been three
instances of negative correlation in the past 25 years, namely in FY05, FY08, and FY10.
While FY10 witnessed an outperformance largely on the back of the nationwide farm loan
waivers announced by the UPA government in 2009, FY08 witnessed an underperformance
on account of a sharp dip in agricultural credit post the global financial crisis.
Past tractor upcycle have lasted 4 years on average

40% 15
30% 10
20% 5
0
10%
-5
0%
-10
-10% -15
-20% -20
-30% -25
FY93
FY95
FY97
FY99
FY01
FY03
FY05
FY07
FY09
FY11
FY13
FY15
FY17
Tractor Volume Growth(%) Monsoon deviation from LPA(%) 96% of LPA
Source: Industry, IMD
The three major upcycles seen over the past 25 years have been in FY94-98, FY03-07 and
FY08-12 and all lasted four years each. Also, all the three upcycles have seen a CAGR of
~15-17% from bottom to peak. Assuming that this cycle also lasts four years with a peak to
bottom CAGR of ~15% to 17%, we believe that volume growth in FY20e could be in the mid
single digits and we expect the tractor cycle to peak out in FY20e.
Loan waivers, subsidy schemes and cash transfers could provide a leg up to growth in
FY20e
Five states announced loan waiver of ~INR1tn in 2018
State Year Amount (INR Bn)
Nationwide 2008 520
AP 2014 430
Telangana 2014 170
Tamil Nadu 2016 60
Maharasthra 2017 340
UP 2017 363
Punjab 2018 100
Assam 2018 6
Chattisgarh 2018 61
Karnataka 2018 340
MP 2018 380
Rajasthan 2018 260
Source: Antique
Post the recent state elections, we saw Chhattisgarh, Rajasthan, and Madhya Pradesh
announcing farm loan waivers to the tune of ~INR700bn. This is in addition to the waivers
announced by Karnataka, Punjab, UP, and Maharashtra in the past two years. On analyzing
the historical impact of farm loan waivers , the strong show in FY10 where the industry grew
by ~32% YoY despite a poor monsoon can be clearly attributed to the nationwide waiver
announced by the UPA government in 2009 totaling ~INR520bn. Also, post the loan waivers
of ~INR600bn announced in AP and Telangana in 2014, we saw subsequent outperformance
in growth in FY16 and FY17 vis-à-vis the national average. Similarly, in UP and Maharashtra,
post the announcement of loan waivers of ~INR700bn in 2017, we witnessed significant
outperformance vis-à-vis the national average of ~22%.
Significant out performance in AP & Telangana... ... as well as UP/Maharashtra post announcement of loan waivers
60.0% 45.0%
52% 39.8%
50.0% 40.0%
33.5%
40.0% 35.0%
30.0%
30.0% 25%
17% 18% 25.0% 21% 22.0%
20.0%
8.9% 20.0% 17%
10.0%
15.0%
0.0% 9.0%
10.0% 6.5%7.5%
-10.0% 5.0%
-2.4%
-10%
-20.0% 0.0%
FY08-15 FY15-16 FY16-17 FY08-17 FY16-17 FY17-18
Volume grow th in UP(%)
Volume Grow th in AP+Telangana(%) Volume grow th in Maharasthra(%)
Volume grow th All India(%) Volume grow th All India(%)
Source: Industry Source: Industry
States like Rajasthan, Chhattisgarh, MP, Karnataka, and Punjab, which have together received
farm loan waivers totaling ~1.1trn in 2018, contribute ~30% to overall tractor sales. With the
recent announcement of direct cash transfers worth INR 6,000 annually to farmers holding <
2 hectares could prove a tailwind for growth in FY20e.
The government had started Sub Mission on Agricultural Mechanization (SMAM)
in 2014-15 to promote agricultural mechanization, enhance farm productivity, and meet the
additional demand for energy for agricultural works. The scheme has four broad objectives,
namely:
Training, testing, and demonstration of agricultural equipments
Training, testing, and demonstration of post harvest tech and management
Financial assistance for procurement of agricultural machinery and equipment
Establishment of Farm Machinery Banks for Custom Hiring
Under the mission, subsidies of ~35% for SC/ST/Women/NE farmers and ~25% for other
beneficiaries will be given. This will be a centrally-sponsored scheme with the Centre's allocation
of ~60% while the respective state governments funding the remainder ~40%. Although the
scheme was started in 2014-15, there were no allocations for the period FY14-16; however,
from FY17, we can see a sharp increase in allocation with FY19e budgeted spend being
~3x that of FY17.
Subsidy structure under SMAM

Type of Agricultural Machinery For SC, ST, Small & Marginal farmers,
Women and NE States beneficiary For other beneficiary
Maximum Permissible subsidy Pattern of Maximum Permissible subsidy Pattern of
per Machine/Equipment per Assistance per Machine/Equipment per Assistance
beneficiary beneficiary
Tractors
(i) Tractor (08-15 PTO HP) Rs. 1.00 lakh 35% Rs. 0.75 lakh 25%
(ii) Tractor (15-20 PTO HP) Rs. 1.00 lakh 35% Rs. 0.75 lakh 25%
(iii) Tractor (20-40 PTO HP) Rs. 1.25 lakh 35% Rs. 1.00 lakh 25%
(iv) Tractor (40-70 PTO HP) Rs. 1.25 lakh 35% Rs. 1.00 lakh 25%
Source: SMAM
Allocation under SMAM increasing

12.0
9.8
10.0 9.0
7.6
8.0
6.0
3.7
4.0
2.0
-
FY17 FY18 FY19e FY20e
Transfers under SMAM (INR Bn)
Source: Union Budget

Subsidy structure under in situ management of crop residue scheme

Maximum Permissible subsidy per Pattern of
S.No. Name of the machine/equipment Machine/ Equipment per beneficiary Assistance
1 Super Straw management System“(Super SMS)
to be attached with“Combine harvester" 56,000 50%
2 Happy Seeder
a) 09 tine 72,800 50%
b) 10 tine 75,600 50%
c) 11 tine 78,400 50%
3 Paddy Strw Chopper/ Shredder/Mulcher
a) Mounted type (Straw Chopper & Mulcher)
i) 5 ft 67,200 50%
ii) 6 ft 728,000 50%
iii) 7 ft 78,400 50%
iv) 8 ft 84,000 50%
b) Trailed type 1,26,000 50%
c) Combo type 1,40,000 50%
4 Shrub Master / Cutter cum Spreader 22,400 50%
5 Hydraulic Reversible M.B. Plough
a) Two bottom 70,000 50%
b) Three bottom 89,500 50%
6 Rotry slasher 22,400 50%
7 Zero Till Seed cum Fertilizer Drill
9 tine 21,280 50%
11 tine 24,080 50%
13 tine 26,880 50%
15 tine 28,000 50%
8 Rotavator
5 feet 42,000 50%
6 feet 44,800 50%
7 feet 47,600 50%
8 feet 50,400 50%
Source: Union Budget
Also, the government has initiated another scheme in Mar 2018 promoting agricultural
mechanization for in situ management of crop residue in states of Punjab, Haryana, Uttar
Pradesh and Delhi NCR to curb pollution. Under this scheme, financial assistance of ~50% of
machinery/equipment will be provided to individual farmers for crop residue management.
The centre has allocated ~11.5bn for FY18-20e with INR5.9bn in FY19 and INR5.6bn in
FY20e. Although the subsidies under this scheme are primarily for implements like Straw
Management Systems, seeders, straw choppers/shredders/mulches and rotavators, the majority
of which require tractors of ~40HP + as their power source to be used effectively and, hence,
encourage tractor sales. These three states together contribute ~25% to tractor sales and
could see an outperformance over the next two years on the back of demand for tractors to
use these subsidized implements.
Construction Equipment witnessing uptick backed by government capex

The CE industry is highly cyclical in nature, given its dependence on capex in infrastructure;
it has grown at a CAGR of ~11.5% over FY06-18, witnessing a decline from FY12-15, but
has rebounded in the past three years, as government focus on infrastructure spending (roads,
railways, and metros) has increased. The government infra spending is a major driver for the
industry being the largest end customer, accounting for nearly two-thirds of demand for
construction equipment.
Construction equipment application

Segment Major Equipment types Applications
Earthmoving equipment 1) Backhoe Loader 1) Mining
2) Excavator2) Excavator
2) Roads
3)Wheeled Loader 3) Real Estate
4) Power
5) Railways/Metros
Material Handling 1) Pick and Carry Cranes 1) ErectionWork
2) Power
3) Steel
4) Mining
5) Railways/Metros
Road Building 1) Compactors 1)Highways
2) Pavers 2) Rural Roads
3) Asphalt Finishers 3) Airports
4) Land Reclamation
5) Motor Graders"
Concrete Equipment 1) Mixers 1) Irrigation Canals
2) Pumps 2) Road Construction
3) Batching Plants 3) Building Construction
4) Airports
Material Processing 1) Compressors 1) Stone Quarries
2) Crushers 2) Mining
Construction industry has grown at CAGR 11.5% over FY06-18 Earth moving and mining the largest segment
100,000 49% 60%
90,000 44% 50%
80,000 33% 40% Concrete, 2.4
29%
70,000 26% 24%
30%
60,000 14% Road, 5.7
12% 20%
50,000
10% Earth Moving
40,000 -5% -5%
0% and Mining, Material
30,000 -11% -13% -18% 77.7 Handling, 9.6
-10%
32,348
48,086
45,500
40,500
50,850
65,750
73,340
64,110
52,400
49,700
56,540
74,990
93,100
20,000
10,000 -20% Material
- -30% Processing,
FY06 FY08 FY10 FY12 FY14 FY16 FY18 4.7
Overall Industry (Units) YoY Growth(%)
Source: Industry, Antique Source: Industry, Antique
Escorts manufactures mainly three products, namely pick-and-carry cranes, backhoe loaders,
and road compactors. Escorts entered an exclusive distribution agreement with Korea's Doosan
Infracore Co Ltd in Feb 2018, which sanctions the sale and service of the entire range of
Doosan products in the Indian market, namely crawler excavators, mini-excavators, and
wheel loaders. Also, it has recently signed a JV with Tadano for specialized products to
address high-end category cranes in the 20-80-ton segment. Post these initiatives, Escorts will
increase its addressable market from ~40% to 90% in value terms in the CE industry. Apart
from Escorts, companies like Action Construction (ACE), JCB and Caterpillar are the major
players.
CE Business: revenue likely to grow at a CAGR of 13.5% over FY19-22e

Escorts is a small player in the construction equipment industry with a market share of ~5% in
the overall industry and ~9% in its served industry; its share in backhoe loaders, which is the
biggest industry segment (~40%), is ~2.3%. However, it remains the largest player in material
handling space with ~40% share of the pick-and-carry crane market. The company operates
primarily in the lower margin hydra cranes segment, which is ~70% of the crane industry with
the remaining 30% being primarily TRX and slew cranes, which relatively have higher-margins.
Escorts share of served industry remains stable at ~9% Launch of TRX / Slew cranes to help regain market share
12.0% 60.0%
10.6%
50.5%
47.5% 47.7% 48.0%
10.0% 8.9% 9.2% 50.0%
8.6% 8.6% 8.5%
38.6%
8.0% 40.0%
6.0% 30.0%
4.0% 20.0%
2.0% 10.0%
0.0% 0.0%
FY14 FY15 FY16 FY17 FY18 9MFY19 FY14 FY15 FY16 FY17 FY18
Overall Served Industry Pic k and Carry Cranes
Share of backhoe loaders remains steady Share of compactors increases by ~170bps over FY14 - 18
4.5% 14.0% 12.9%
4.0%
4.0% 12.0% 11.3%
3.5% 9.6% 9.6%
2.9% 10.0% 8.8%
3.0%
2.2% 2.3% 2.3% 8.0%
2.5%
2.0% 6.0%
1.5%
4.0%
1.0%
2.0%
0.5%
0.0% 0.0%
FY14 FY15 FY16 FY17 FY18 FY14 FY15 FY16 FY17 FY18
Bakhoe Loaders Compactors

We expect revenue to grow at a CAGR of 13.5% over FY19-22e for Escorts' CE business
on the back of:
Strong traction in the road construction activity: The construction equipment industry
is on an upward trajectory over the past three years, led by a pick-up in the pace of road
construction and mining activity. Ordering activity for road construction has picked up pace
since FY14, which should lead to strong growth in execution of road projects over the next
few years. Also, increased traction in metros is likely to give a fillip to the construction equipment
industry.
Strong traction in ordering of roads Uptick in allocation towards metro projects

20000 450 410 400
18000 360
267
16000 225
10,000 270
14000 178 172
180 137 122
12000 9,659 82 67
11,934 90
10000
8000 3,303 0
Delhi Metro-Phase 4
Mumbai Metro-Line 5
Mumbai Metro-Line 9
Indore Metro
Patna Metro-phase 1
Chennai Metro-
5,730
Bhopal Metro
Kanpur Metro
Agra Metro
Varanasi Metro
6000 4,821
phase 2
10,000
4000 4,883 7,396
6,491
2000 4,368 4,337
800 3,069
0 1,116 1,438
FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19E
NHAI Roads Ordered (KM) MORTH Roads Ordered (KM) Allocation (INR Bn)
Taking initiatives to gain share in backhoe loaders: Escorts is a small player in the
construction equipment industry with 5% market share. The company is a leading player in
the pick-and-carry crane segment but is a marginal player in the largest segment (earth
moving equipment). One of the biggest segments in the earth moving equipment industry is
the backhoe loader segment. JCB is the leader in that segment with a market share of 75%.
The company has launched four wheel drive backhoe loaders to enhance productivity of the
equipment and improve power. Escorts is also trying to boost fuel efficiency of its backhoe
loaders to improve market share. It is planning to export backhoe loaders, targeting to achieve
10% of its volumes through exports.
Renewed focus on high-margin cranes: Escorts is a leading player in the low-margin
hydra cranes segment, deriving close to ~70% of its crane volumes from this segment. The
crane segment is divided into three segments: (1) hydra cranes (low-margin), (2) TRX/safe
cranes (mid-single digit margin) and (3) slew cranes (double-digit margin). Hydra cranes
form 68% of the crane industry volumes while TRX and slew cranes comprise 32%. Escorts
dominates the hydra crane segment while it has a lower market share in TRX and slew
cranes. Escorts plans to launch new products and expand its offerings in the slew crane
segment and has also entered into a JV for manufacturing high-end cranes with Tadano.
Construction EBIT margin to increase by ~150bps to 3% over FY19-22e

We forecast the CE division to achieve a turnover of INR14bn by FY20 and achieve an EBIT
margin of 3% by FY22 (break-even achieved in FY18). The company is targeting to achieve
a high single-digit EBIT margin in the medium term through focus on material cost reduction
and rationalization of high fixed costs.
Escorts' construction equipment vertical is operating at a margin profile lower than that of
competitors like Action Construction and JCB, which had EBIT margins of 8% (FY18) and 13%
(FY17) respectively due to higher employee costs and majority of portfolios consisting of low-
margin hydra cranes. This CE business is more comparable to Action Construction than JCB,
which has a much higher scale and presence in high-margin backhoe loader segment (75%
share).
EBIT margins lags behind peers due to high employee cost & low margin portfolio
EBIT margins (%) FY14 FY15 FY16 FY17 FY18
Action Constructions 2.5 3.8 4.6 4.7 8.1
Escorts -4.2 -4.8 -6.6 -2.3 1.9
JCB 11.6 10.9 11.7 12.9 NA
Revenue to grow of CAGR of ~13.5% over FY19 - 22e, EBIT margins to increase by 150bps
16,000 4%
3.0%
14,000 2.5%
3%
2% 2.0%
12,000 1.5%
2%
10,000
1%
8,000
0%
6,000
-1%
4,000 11,144
12,731
13,894
-2%
6,069
7,800
9,500
2,000 -2%
- -3%
Revenue (INR Mn) EBIT Margin(%)

Railways business: revenues to grow at an 17.5% CAGR over FY19-22e

Escorts' railway business could benefit substantially from the increased focus of the government
on stepping up investments in railways. Escorts primarily supplies braking parts and couplers
to railways. Development of new products like bogie-mounted brake systems and axle-mounted
disc brakes, along with increased demand for existing products, can potentially increase the
revenue from its railway division to 1.6X in the next three years.
The three key reasons for strong growth in the railways business segment are:
Robust order book: Escorts has an order book of INR4.5 bn, which will be executed
in the next 6-12 months. It aspires to grow the revenue base by 4x from FY17 levels by
FY22 with an EBIT margin of 17-19%. It is currently developing new products for railways
like (bogie-mounted braking systems, axle mounted disc brakes, brake pads, and coupler
assembly).
Order book at a record high of INR 4.5bn

5,000 4,500
4,500 4,000
4,000 3,500
3,300
3,500 3,000
3,000
2,500
1,750
2,000 1,550 1,500
1,300
1,500 1,000 1,100
1,000
500
-
Q1FY17
Q2FY17
Q3FY17
Q4FY17
Q1FY18
Q2FY18
Q3FY18
Q4FY18
Q1FY19
Q2FY19
Q3FY19
Railways Order Book (INR Mn)
Increased focus on domestic sourcing by Indian railways: Escorts is hoping

to gain market share in railways due to substitution of imports by Indian railways to
promote the 'Make in India' program. This will likely increase the addressable market
opportunity for Escorts.
Trusted vendor: Escorts ventured into the railways business in 1962 and has developed
a niche in products like brake systems, couplers, suspension systems, and composite
materials and testing equipment. The company's strategy is to focus on developing products
related to rolling stock segment. The company bids for railway contracts for braking
systems and suspension components. Companies bidding for railway contractors need to
get approvals from Research Designs and Standards Organization (RDSO) department
of railways, which can be a time-consuming process. Escorts has built strong relationships
in railways and has also developed product capabilities, which has helped it secure
contracts from railways for the past many decades.
Current product portfolio

Component Approved vendors Annual Prodution Capacity
Compressed Air Braking Equipment Escorts 9,120
Faiveley 3,100
Greysham 3,000
Knorr Bremse 8,400
L Type Brake Blocks with container flat wagons Escorts 587,700

MSU Brake Pads 765,000
Rane Brake lining 1,036,800
L Type Brake Blocks for stock with 1000m Wheel dia Escorts 2,184,840
Bony Polymers 299,520
Cemcon 778,752
Hindustan Composites 1,231,200
Industrial Laminates 1,123,000
MASU Brake Pads 850,000
Om Besco Super 252,000
Rane Brake Lining 1,036,800
Sundaram Brake Lining 124,800
Double Acting Hydraulic Shock Absorbers for secondary suspension Escorts 140,400
Gabriel 24,000
India Auto 60,000
Knorr Bremise 42,000
Electro Pneumatic Brake Escorts 1,500

Knorr Bremise 1,200
Westinghouse 500
Faiveley 1,800
K type high friction composite brake blocks for coaches with bogie mounted brake Escorts 1,200,000
Bony Polymers 599,040
Cemcon Engg 580,000
Hindustan Composites 720,000
Rane Brake Lining 660,000
Sundaram Brake Lining 120,000
Om Besco 84,000
Daulat Ram Brakes 179,712
K type high friction composite brake blocks for EMU Stock Escorts 1,200,000
Cemcon 580,000
Hindustan Composites 750,000
Rane Brake Lining 300,000
Distributor Valve Escorts 17,400

Faiveley 3,120
Knorr Bremise 4,800
SD Technical Sevices 800
Air Suspension Control Equipments Escorts 1,200

Faiveley 2,400
Knorr Bremise 1,200
Current product portfolio (contd...)

Component Approved vendors Annual Prodution Capacity
Couplers and Draw Gears Escorts 1,800
Sanrok 1,200
Westinghouse 500
High Tensile Lock Centre Buffler Coupler Escorts 1,500

Faively 3,000
L Type Composition Brake Block, ALCO, Electric Locomotives Escorts 2,400,000

MASU 820,000
Rane Brake Lining 1,080,000
Industrial Laminates 999,900
Hydraulic Dampers Escorts 8,400

India Auto 60,000
Knorr Bremise 48,000
Source: RDSO
Products under development

Component Developmental Annual Prodution Market Capacity Total Capacity
Vendor Capacity (Ex Escorts)
Side Bearer Rubber Spring Escorts 107,040 107,040
Bogie Mounted Brake System Escorts 6,300 53,800 60,100
Silent Block for Anchor Link Escorts 272,160 751,552 1,023,712
Axle Mounted Disc Brake System for LHB Mainline Coaches Escorts 900 1,860 2,760
Brake Pad for LHB Coaches Escorts 800,000 201,700,000 202,500,000
Microprcoessor controlled Air Brake System Escorts 360 1800 2,160
Primary Vertical Damper for HHP Locomotives Escorts 9,000 154480 163,480
Secondary Yaw Damper Escorts 9,000 170480 179,480
Coupler Assembly Escorts 1,200 3900 5,100
Source: RDSO
Railway EBIT margin to expand by ~150bps to 16.5% over FY19-22e

We estimate railway EBIT margin to increase from 15% in FY19 to 16.5% by FY22, led by
operating leverage benefits and rationalization of manpower costs. Escorts maintains a healthy
double-digit EBIT margin in this division due to limited competition and return on capital
employed due to lower competitive intensity.
Revenue to grow at CAGR of ~15.5% over FY19 - 22e, EBIT margin increase by 150bps
7,000 15.5% 16.0% 16.5% 18%
15.0%
6,000 13.9% 16%
13% 14%
5,000
12%
4,000 10%
3,000 8%
6%
2,000
4%
2,425
2,866
3,554
4,265
5,032
5,787
1,000 2%
- 0%
Revenue (INR Mn) EBIT Margin(%)

Financial analysis
Revenue to grow at a CAGR of ~11% over FY19-22e
We forecast a 11% CAGR in revenue for Escorts over FY2017-20E, driven by: (1) 10% CAGR
in tractor revenues (8% CAGR in tractor volumes and 2% improvement in average selling
prices), led by domestic industry outperformance and export volumes nearly doubling, (2)
17.5% CAGR in the railway business revenue, led by new products increasing addressable
market and continued traction in order wins on existing portfolio, and (3) 13.5% CAGR in
construction equipment revenues on the back of robust government spending on road
construction & metros and entry into high-end cranes.
Tractor revenues to grow at CAGR of ~10% over FY19 - 22e Construction revenues to grow at CAGR of 13.5% over FY19-22e
70,000 22% 22% 25% 16,000 33% 35%
29%
60,000 14,000 30%
18%
20%
12,000 22%
50,000 25%
15% 10,000 17%
40,000 10.9% 20%
9.8% 9.5% 8,000 14%
30,000 15%
10% 6,000 9%
20,000 10%
4,000
11,144
12,731
13,894
33,460
39,580
48,386
53,649
58,930
64,530
5%
6,069
7,800
9,500
10,000 2,000 5%
- 0% - 0%
FY17 FY18 FY19e FY20e FY21e FY22e FY17 FY18 FY19e FY20e FY21e FY22e
Revenues (INR Mn) YoY Growth(%) Revenues (INR Mn) YoY Growth(%)
Railway segment revenues grow at ~17.5% over FY19-22e Consol revenues to grow at CAGR of ~11% over FY19-22e
7,000 30% 90,000 22.5% 25.0%
20.4%
24% 80,000
6,000 25% 17.3% 20.0%
20% 70,000
5,000 18% 18% 18% 60,000
20%
15% 12.4% 15.0%
4,000 50,000 11.1%
15% 9.8%
40,000
3,000 10.0%
10% 30,000
2,000
20,000
41,676
50,160
61,440
69,058
76,693
84,212
5.0%
2,425
2,866
3,554
4,265
5,032
5,787
1,000 5% 10,000
- 0% - 0.0%
Revenues (INR Mn) YoY Growth (%) Revenues(INR Mn) YoY Growth(%)

EBITDA margin to expand by ~40bps over FY19-22e, led by rationalization of fixed costs
We expect EBITDA margins for Escorts to expand by ~40bps to 12.3% over FY19-22e. Escorts
has a higher cost structure than its competitors primarily on account of lower contribution
margin and higher employee costs due to legacy labor force with lower proportion of contract
employees at its plants. We expect Escorts to improve its EBITDA margin primarily on the back
of 1) rationalization of manpower costs, 2) improvement in construction equipment margins
with higher proportion of high end cranes and 3) ramp up of higher margin export volumes
in the tractor segments. We expect Escorts to post an earnings CAGR of 13% over FY19-22e.
Raw material costs to stay in range of ~67% over FY19-22e Employee cost to decline by 20bps over FY19-22e
68.4% 68.2% 12%
68.2% 9.5%
10% 8.6%
68.0% 7.8% 7.7% 7.7% 7.6%
67.8% 67.6% 8%
67.6% 67.5%
67.3% 6%
67.4% 67.2% 67.3%
67.2% 4%
67.0%
2%
66.8%
66.6% 0%
Raw Material Cost (% of Sales) Employee Costs (% of Sales)
Other expenses to decline by 30bps over FY19-22e EBITDA margins to expand by 40bps over FY19-22e
14.5% 14.3% 14%
12.0% 12.2% 12.0% 12.3%
12% 11.2%
14.0%
10%
13.5% 7.9%
13.0% 12.9% 8%
13.0% 12.8% 12.7% 12.6% 6%
12.5%
4%
12.0% 2%
11.5% 0%
Other Expenses (% of Sales) EBITDA Margin(%)
Share of tractors in overall EBIT to drop by ~400bps over FY19-22e Earnings to grow at CAGR of ~13% over FY19-22e
120% 8,000
6,784
100% 8.5% 6.7% 7.1% 7.7% 8.4% 9.0% 7,000
2.5% 1.9% 2.6% 5,947
3.3% 3.9% 5,376
6,000
80% 4,716
5,000
60% 3,515
4,000
95.3% 90.8% 91.0% 89.7% 88.3% 87.1%
40% 3,000
1,974
20% 2,000
1,000
0% -3.8%
-
-20% FY17 FY18 FY19e FY20e FY21e FY22e
Adjusted Net Profit(INR Mn)
Agri Machinery Construction Equipment Railw ays
Expect strong FCF generation; return profile to stay steady

Escorts is expected to generate cumulative OCF of ~INR17.7bn over FY19-22e backed by
stable revenue growth, improving margins and stable working capital/ sales ratios. We
expect cumulative capex over the same period to be ~INR7bn primarily consisting of ~INR3bn
in FY20e towards the Kubota JV. Given the strong OCF generation, Escorts will be able to
fund its capex requirements through internal accruals. We expect a slight moderation in
blended RoCE as Escorts invests in ~INR3bn in the Kubota JV, volumes from which will start
ramping up post FY22e. However we expect the construction equipment and railways to
improve their return ratios as EBIT margins improve from 1.5% in FY19 to 3% by FY22e and
15% in FY19 to 16.5% by FY22e for the construction and railway segments respectively. We
expect Escorts to continue to maintain its net cash position.
Capex /sales to decline post FY20e Working capital days to remains stable
5% 4.3% 35.0
29.5
30.0
4%
25.0 22.2 22.2 22.2 22.2 22.2
3% 2.4% 2.5% 2.5% 20.0
2.0%
2% 1.6% 15.0
10.0
1%
5.0
0% 0.0
Capex/Sales Working Capital Days (x)
Return ratios to remain above 20% Construction & Railway RoCE to increase
25.0 21.8 21.7 60 51 51 54 56
20.7 48 46 48
20.4 50 43 45 43
39 41
20.0 18.2
40
30 19 22
15.0 18 15
11.6 20 11
10.0 10
0
5.0 -10
-20
0.0
-30 -25
RoCE(%)
Agri RoCE (%) Construction RoCE(%) Railw ays RoCE(%)
Will continue to generate healthy FCF And maintain its net cash position
5,000 4,485 FY17 FY18 FY19e FY20e FY21e FY22e
3,928 0.0
4,000 3,444
2,944 (0.1) (0.1)
3,000 2,591
2,335
(0.2)
2,000
(0.3)
1,000 (0.3)
(0.4) (0.3) (0.4)
- (0.4)
FY17 FY18 FY19e FY20e FY21e FY22e (0.5) (0.4)
FCF (INR Mn) Net Debt/Equity(x)

Company Profile
Escorts was set up in 1948 by Mr Yudi Nanda and Mr HP Nanda as an agri machinery
company. Over the years, the company collaborated with foreign companies and set up its
manufacturing facility for tractors. In addition to tractors, the company also diversified into
various business segments, including construction equipment, railways equipment and auto
components (divested). Escorts is the fourth largest tractor manufacturer in India with ~11.3%
market share. The company also manufactures cranes and backhoe loaders for the construction
industry and makes brake parts for Indian railways. The lion's share of the company's revenue
comes from its tractor business while construction equipment business (15% of revenues) and
railway equipment business (6% of revenues) form the rest of the revenue.
Share of revenue (FY19e) Share of EBIT (FY19e)
Construction
Construction Equipment,
Equipment, 1.9%
15.5%
Agri
Railw ays,
Agri Machinery,
7.1%
Machinery, 91.0%
78.7% Railw ays,
5.8%
Shareholding pattern
13.0%
39.0%
27.0%
4.0%
17.0%
Promoters (Direct Holding) Escorts Benefit & Welfare Trust DIIs FIIs Others
Source: Company
Management profile
Name Profile
Mr. Nikhil Nanda Mr. Nikhil Nanda is a third generation entrepreneur and the driving force behind the Group’s diversified business
Chairman and Managing Director portfolio. He has played a vital role in monitoring the company’s performance and steering the operations to
greater heights. His overall contribution spanning more than 15 years has been immeasurable, particularly in the
areas of operations, finance and senior management functions such as strategic planning and investment decisions.
Mr. Nanda is an alumnus of Wharton Business School, Philadelphia, with majors in Management and Marketing.
Mr. Shailendra Agarwal Mr. Shailendra Agrawal is a mechanical engineer with 35 years of diverse experience in Tata Motors, Hero
Executive Director Motors and Escorts Limited. A strong advocate of challenging established benchmarks and driving transformation,
he has led business transformation at Escorts Limited through Business Process Re-engineering. As President of
Hero Motors, he was instrumental in successful turnaround of Auto component business. He played a key role in
creating product and technology roadmap through introduction of world class “product development process” and
forging technology partnerships with leading technology providers. He is currently leading 2020 Business trans
formation project titled LEAP and initiative for achieving TPM special award.
Mr. Shenu Agarwal Shenu is a Mechanical Engineer from NIT Kurukshetra and MBA from Duke University, USA, with 26 years of
Chief Executive, diverse experience. He joined the Escorts Group as a GET and worked in different key positions across domestic
Agri Machinery and international sales and marketing, R&D and product development, strategy and project management. After his
last position as Head of KMC (R&D), he is currently driving sales and marketing transformation for EAM, while also
creating new growth engines for Escorts by driving new and emerging businesses. He is a visionary and executor,
leading Escorts Vision 2022.
Mr Ajay Mandahr Mr. Mandahr has over 25 years of rich experience in leadership positions including turnaround in Sales and
Chief Executive, Marketing, developing new product categories, developing new business model, etc. in companies like L&T, Indian
Construction Equipment Aluminium and Manitou South Asia Ltd. His last assignment was with Toyota Material Handling as Director –
Operations. Mr. Mandahr is a Mechanical Engineer and MBA (Marketing).
Mr Dipankar Ghosh Mr. Dipankar Ghosh has 23 years of rich experience in full lifecycle product development,manufacturing
Chief Executive, operations, engineering management, business development, and technology transfer from many Railway OEMs
Railways Equipment Division to India. He is an ex-Indian Railway Service officer and was the Vice President with John Deere India in his last
assignment. Mr. Ghosh is a post graduate in Engineering from BITS Pilani, and has done his management from
Indian School of Business, Hyderabad, besides Advanced Global Leadership from London School of Economics as
a British Chevening Scholar.
Mr Bharat Madan Mr. Madan has 27 years of rich experience in financial management. He joined Escorts in 2005, and has since
Chief Financial Officer looked after overall financial accounting, audit, cash and capital management, forecasting and risk management,
tax planning and optimization, financial modelling and analysis, and other such responsibilities. He has played a
key role in the integration and consolidation of the finance function across all business units of the Group. In his last
assignment, he was the Associate Vice President – Finance with Electrolux Kelvinator. He has previously worked
with Spectrum Paints and Vishwanath Singh & Associates. Mr. Madan is a 1988 batch Chartered Accountant.
Financials
Profit and loss account (INRm) Cash flow statement (INRm)
Year ended 31 Mar 2017 2018 2019e 2020e 2021e Year ended 31 Mar 2017 2018 2019e 2020e 2021e
Net Revenue 40,932 49,951 61,490 69,058 76,693 PBT 2,768 5,088 6,935 8,024 8,876
Op. Expenses 37,695 44,379 54,124 60,614 67,454 Depreciation & amortisation 645 725 775 864 921
EBITDA 3,237 5,572 7,366 8,444 9,239 Interest expense 311 286 30 - -
Depreciation 631 725 775 864 921 (Inc)/Dec in working capital 398 (36) (703) (461) (465)
EBIT 2,606 4,847 6,590 7,579 8,318 Tax paid (444) (1,020) (2,219) (2,648) (2,929)
Other income 435 594 375 445 557 Less: Interest/Div. Income Recd. (435) (594) (375) (445) (557)
Interest Exp. 311 286 30 - - CF from operating activities 3,244 4,449 4,444 5,335 5,845
Extra Ordinary Items -gain/(loss) (38) 68 - - - Capital expenditure (653) (1,006) (1,500) (3,000) (1,917)
Reported PBT 2,692 5,223 6,935 8,024 8,876 Inc/(Dec) in investments (1,596) (2,954) (1,300) (1,500) (3,000)
Tax 756 1,641 2,219 2,648 2,929 Add: Interest/Div. Income Recd. 435 594 375 445 557
Reported PAT 1,936 3,582 4,716 5,376 5,947 CF from investing activities (1,814) (3,365) (2,425) (4,055) (4,360)
Net Profit 1,936 3,582 4,716 5,376 5,947 Inc/(Dec) in share capital 7 2,506 - - -
Adjusted PAT 1,974 3,515 4,716 5,376 5,947 Inc/(Dec) in debt (979) (2,131) (501) - -
Adjusted EPS (INR)* 23 41 55 63 70 Dividend Paid (406) (370) (600) (650) (719)
Others (193) (254) 0
Balance sheet (INRm) CF from financing activities (1,572) (249) (1,100) (650) (719)
Year ended 31 Mar 2017 2018 2019e 2020e 2021e Net cash flow (142) 835 918 630 767
Share Capital 1,226 1,226 1,226 1,226 1,226 Opening balance 2,426 2,284 3,119 4,037 4,667
Reserves & Surplus 18,686 24,255 28,401 33,128 38,356 Closing balance 2,284 3,119 4,037 4,667 5,434
Networth 19,912 25,481 29,627 34,354 39,581
Debt 2,628 501 - - - Growth indicators (%)
Net deferred Tax liabilities 22 585 585 585 585 Year ended 31 Mar 2017 2018 2019e 2020e 2021e
Capital Employed 22,562 26,567 30,212 34,939 40,167 Revenue(%) 21.6 22.0 23.1 12.3 11.1
Gross Fixed Assets 24,220 24,627 26,127 29,127 31,044 EBITDA(%) 83.2 72.1 32.2 14.6 9.4
Accumulated Depreciation 8,677 9,049 9,824 10,689 11,610 Adj PAT(%) 74.7 78.1 34.2 14.0 10.6
Capital work in progress 581 873 873 873 873 Adj EPS(%) 74.7 78.1 34.2 14.0 10.6
Net Fixed Assets 16,124 16,451 17,175 19,311 20,307
Investments 5,875 8,943 10,243 11,743 14,743 Valuation (x)
Non Current Investments 4,150 4,069 4,069 4,069 4,069 Year ended 31 Mar 2017 2018 2019e 2020e 2021e
Current Investments 1,724 4,874 6,174 7,674 10,674 P/E 34.0 19.1 14.2 12.5 11.3
Current Assets, Loans & Adv. 12,631 17,270 20,824 23,183 25,694 P/BV 3.4 2.6 2.3 2.0 1.7
Inventory 4,295 5,411 6,660 7,480 8,307 EV/EBITDA 26.6 15.5 11.7 10.2 9.3
Debtors 4,580 6,000 7,386 8,295 9,212 EV/Sales 2.1 1.7 1.4 1.2 1.1
Cash & Bank balance 2,284 3,119 4,037 4,667 5,434 Dividend Yield (%) 0.2 0.3 0.2 0.3 0.3
Loans & advances and others 1,472 2,740 2,740 2,740 2,740
Current Liabilities & Prov. 12,068 16,097 18,030 19,298 20,577
Financial ratios
Liabilities 10,785 14,800 16,733 18,001 19,280
Year ended 31 Mar 2017 2018 2019e 2020e 2021e
RoE (%) 9.9 13.8 15.9 15.7 15.0
Provisions 1,283 1,297 1,297 1,297 1,297
RoCE (%) 11.6 18.2 21.8 21.7 20.7
Net Current Assets 563 1,173 2,794 3,885 5,116
Asset/T.O (x) 1.2 1.2 1.3 1.3 1.3
Application of Funds 22,562 26,566 30,212 34,939 40,167
Net Debt/Equity (x) (0.1) (0.3) (0.3) (0.4) (0.4)
Per share data EBIT/Interest (x) 9.8 19.0 231.9 NA NA
No. of shares (m) 123 123 123 123 123
Margins (%)
Diluted no. of shares (m) 123 123 123 123 123
EBITDA Margin(%) 7.9 11.2 12.0 12.2 12.0
BVPS (INR)* 233 299 347 403 464
EBIT Margin(%) 6.4 9.7 10.7 11.0 10.8
CEPS (INR)* 30 50 64 73 81
PAT Margin(%) 4.8 7.0 7.6 7.7 7.7
DPS (INR)* 1.2 2.0 1.8 2.0 2.0
Source: Company Antique
Source: Company, Antique; * adjusted for treasury shares
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INDIA RESEARCH

Powering the Dreams Ensuring Safety and Becoming the Preferred

Priya Ranjan Vikrant Gupta Apoorva Patil

Reco : BUY INITIATING COVERAGE

Key investment arguments

Source: Company, Antique Source: Company, Antique

Share of opportunity markets increased by ~900bps

Source: Company, Antique Source: Company, Antique

Source: Company, Antique Source: Company, Antique

5 year average PE is 12x 5 year average EV/EBIDTA is 10x

P/E(x) Average P/E(X) +1 S.D -1 S.D EV/EBITDA(x) Mean +1 S.D -1 S.D

Source: Company, Antique Source: Company, Antique

Expect further tractor market share gains on targeted product approach/

R&D Expenditure (% of Net Sales) Esc orts Market Share (%)

Source: Company, Antique Source: Company, Antique

Increase focus on R&D leads to new launches from FY15

Source: Company, Antique Source: Company, Antique

Source: Company, Antique Source: Company, Antique

Escorts has learned from past market share loss

M&M TAFE Escorts Sonalika John Deere Others

Source: Company, Antique

Channel expansion in opportunity markets

Source: Company, Antique Source: Company, Antique

Share in North(%) Share in South(%)

Source: Company, Antique Source: Company, Antique

Share in West(%) Share in East(%)

Source: Company, Antique Source: Company, Antique

Dealership network comparison

Expects share in industry exports to increase to ~5% by FY22e

Source: Company, Antique

20,000 5.0% 1000

Source: Company, Antique Source: Company, Antique

Source: Company, Antique Source: Company, Antique

Agri-machinery EBIT margin to remain stable over FY19-22e

Tractor EBIT margin to remain stable over FY19-22e

EBIT Margins (%)

Source: Company, Antique

Raw Material Costs (% of sales)

Employee Costs (% of sales)

Minimum land holding of ~5 acres is required to own a tractor

Income per Cropping (INR) 7,880

Monthly per capita Expenditure in Rural Areas (INR) 1,400

% of Land holdings by size (Hectares)

<.01 (ha), 2.6%

Structural drivers remain in place to maintain historical growth trajectory

Source: Industry, Antique

Paddy MSP (INR/Quintal) Wheat MSP (INR/Quintal)

Source: CACP Source: CACP

Cereal Yields (Kg/Hectare)

Source: Ministry of Agriculture Source: World Bank

Source: Ministry of Agriculture Source: Union Budget

Tractor industry growth to be driven by un-matured states

20.0 42.4 41.9 39.7 34

Punjab, Haryana and Gujarat have high tractor penetration levels

HH P enetratio n(%) Sales CA GR FY08-18(%)

A ll India HH P enetratio n (%) A ll India Sales CA GR FY08-18(%)

Source: Industry, Antique

Structural shift towards higher horsepower tractors to continue

Increased focus on domestic sourcing by Indian railways: Escorts is hoping