Escorts poor Q3FY22 results are not a surprise with flat revenue growth and a steep decline in profits

In Q3FY22 the margins had a big hit due to negative operating leverage and volume drop in tractor and construction equipment division.

A leading tractors manufacturer Escorts announced their Q3 results during the last hour of yesterday’s trading session. It gained 0.8% yesterday post-result announcement, the momentum continued today with another 0.82% increase for the day. Price movement shows the street is not surprised with poor numbers.

Q3 earnings report:  

On a consolidated basis, Escorts Revenue declined 3% to Rs 1,957 crore on a YoY. Overall the company’s volume sale has gone down by around 19.8% against the industry volume decline of 9.8%. Major revenue contributor Escorts Agri Machinery (76.9% of revenue) was down by 8.9% YoY, Escorts construction equipment(12.6% of revenue) was up by 12.9% YOY, Railway equipment division(8.8% of revenue) was up by 48.1% YOY.

EBITDA declined 27.3% to Rs 264 crore on YoY, as a result, margins got contracted 453 bps on YoY stood at 13.5%. This margin contraction is due to an increase in the raw material cost, around 450 bps increase in the cost of raw materials as a percentage to sales. This quarter got negatively impacted by operating leverage and volume drop in tractor and construction equipment division.

Net Profit slumped 28.2% to Rs 201.5 crore on YoY. The net profit margin is 10.2% which got contracted 280 bps on YoY. The tractor industry has now been impacted for two consecutive quarters due to the high base of last year, a delayed harvest of Kharif crops owing to late monsoon rains this year which affected the rural cash flows and the retail demand.

Outlook: The company expects cash flows to improve with better Kharif procurement and a positive outlook with good Rabi sowing. While high inflation remains a concern, they are hopeful of macro-economic factors to be in favour of agriculture to boost rural demand. We continue to invest in new product development and distribution spread to offer enhanced reach and customer experience across domestic and global markets. Multiple initiatives in agriculture and infrastructure development focus from the government will be helpful in creating opportunities across their agriculture, construction & railway portfolio.

At 3.30 PM, Escorts closed at Rs 1,856, up by 0.82% for the day.