ESCORTS KUBOTA REPORTED MUTED PERFORMANCE IN Q2FY23 AND WAS BELOW OUR ESTIMATES ON THE MARGINS FRONT

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  Total operating income for Q2FY23 came in at Rs 1,883.5 crore, up 13.3% YoY vs. our estimates of Rs 1,843 crore. Within segments, gross revenue from agri equipment machinery (EAM) i.e. tractors stood at Rs 1,455 crore up 17.2% YoY (I-Direct estimate Rs 1,412 crore) amid 12.5% YoY tractor volume jump to 23,703 units. ASPs, however, surprised positively at Rs 6.14 lakh/unit (up 3.1% QoQ) vs. our expectation of Rs 5.95 lakh/unit. Gross revenue from construction equipment de-grew 1.7% QoQ to Rs 242 crore in Q2FY23 while railway equipment division was up 5% QoQ at Rs 182 crore. Volumes in the construction equipment declined by 5% QoQ to 917 units. Present Railway order book stands at Rs 900 crore as of September 2022 end vs Rs 850 crores as of June 2022.  EBITDA in Q2FY23 stood at Rs152.7 crore (down 24.3% QoQ) with attendant EBITDA margins at 8.1% (down 190 bps QoQ; I-Direct estimate: Rs 165.9 crore, 9%). Margin performance was lower than our expectation. Gross margins contracted by ~20 bps QoQ, while real negative surprise came in the form of higher employee costs which was up 110 bps QoQ at 7.9% of sales.  EAM EBIT margins declined by ~220 bps sequentially to 8.4% while the same for the construction equipment and railways division stood at -2.6% (down 360 bps) and 14.6% (up 109 bps) respectively. Consequent PAT in Q2FY23 was down 40.5% QoQ and 50.4% YoY at Rs 87.7 crore (I-direct Estimate: Rs 150.1 crore). It includes one time exceptional loss of Rs 72.8 crores on account of impairment of investment in the JV Tadano Escorts India Private Limited

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 Escorts Kubota is a prominent tractor maker domestically with ~9.4% market share as of H1FY23. In recent past company has simplified its structure by merging Escorts Kubota India Pvt Ltd & Kubota Agriculture Machinery Pvt Ltd. However, we would await management colours on scaling up operations of company and regaining its lost market share. With Kubota at helm with majority share in the company expectations are ripe for a much larger play by the company in the farm mechanisation side both domestically as well as globally.

Impact:

Negative