- 05 Sep 2024
- ICICI Securities
EKL IN TALKS TO SELL ITS RAILWAY BUSINESS.
News: According to media sources, Sona BLW is in talks with Escorts Kubota Limited to acquire Escorts railway business. Earlier in October 2023, it was reported that Knorr-Bremse Group is likely to buy Escorts railway business for over ₹4,000 crores. Media sources also indicate Sonal BLW launching a QIP amounting for ~₹ 2,000 crore for funding this acquisition (board approval taken during Q1FY25 results).
Views: For FY24, Escorts Kubota's railway business reported a revenue of ₹950 crores (up 13% YoY), contributing 11% to the company's overall top line, with an EBIT of ₹179 crores (EBIT margins at ~19%) and a remarkable ROCE of 50%+. As of Q1FY25 end it had a pending orderbook of ₹ 880 crore. Based on P/S valuation methodology, comparing Escorts railway business with other listed businesses as well as prevailing valuations at which Escorts trades (~5x P/S on FY24), this segment can potentially command a P/S of ~4-5x, pegging the fair value at ~₹4,000 -5,000 crore. We are closely monitoring this space and any deal below ₹ 4,000 crore would be prima facie negative for Escorts Kubota.
Impact: Neutral