We welcomed Mr. Shenu Agarwal, President of Agri and Construction Equipment at Escorts, on September 14, 2021. The company reiterated its expectations of low to mid-digit growth for the industry in FY22. Sentiment has improved in recent weeks with the resumption of the monsoon and the appearance of smaller festivals (such as the Ganesh festival). Strong growth in non-agricultural (commercial) tractor use should help further. Escorts expects to grow better than the industry both during Festivals and Fiscal Year 22 as a whole.
The upward cycle in demand could be sustained: the solid base of the previous year was a major concern for the growth of the market. However, according to management, improving tank and retail funding levels could also help the industry generate growth in FY 23 (compared to our estimate of an average single-digit decline) . With industry penetration far from saturated and most of the demand drivers still in place, the current bull cycle could be sustained over the medium term, according to management.
Long-term industry drivers remain intact: The domestic tractor industry remains under-penetrated, as noted in our recent note “Tractor Value Load and Investor Apathy – II of August 31, 2021”. References from relatively high penetration states (such as Punjab and Haryana) suggest that there is significant long-term potential for other states to catch up. Long-term growth of the industry is expected to be supported by 1) increasing penetration levels in addressable land properties by 20 million euros (> 2 ha) from 30% currently to 60-70% as accessibility improves; 2) increased access to marginal farmers (land holdings of less than 2 ha) through innovative rental models; and 3) the increase in average horse power (Hp) per acreage, which is among the lowest compared to other major agro-economies. According to the escorts, the tractor population has the potential to double from the current c7m units before saturation.
Exports are an important focus for Escorts: we remain positive on the long-term growth potential of exports (taking into account a volume CAGR of 25% on the FY21-24e), in part aided by its partnership with Kubota . While exports now represent only 5% of overall tractor sales, the R&D effort in terms of product development is disproportionate.
The company aims to roll out several new products soon and build on Kubota’s network and experience.
Keep ‘buy’ and target price of Rs 1,580: The recovery in demand in major markets could help improve escorts market share in FY 22. The long-term story seems intact with the ’emphasis on product development, income diversification and improved reach.