In its latest update, Emkay Research has upgraded its rating on Escorts Kubota from ‘ADD’ to ‘BUY’, reflecting improved growth prospects, particularly in the exports market. The revised target price of ₹4,700 per share, based on a 30x FY26E Price-to-Earnings ratio, underscores the firm’s confidence in the company's future performance. The report highlights that favorable monsoon conditions and Kubota’s long-term strategy to increase sourcing from India are major growth catalysts for Escorts. With an EPS CAGR of 16% over FY25E-27E, this analysis points to a promising upcycle for the stock.

Tractors Set to Enter Upcycle from H2 FY25

The Indian tractor industry has experienced a favorable shift in fundamentals following the conclusion of the 2024 monsoon season, which saw an 8% higher rainfall than the long-period average. This, combined with improved Kharif crop acreage and increased reservoir capacity, points to a cyclical recovery in tractor volumes starting in H2 FY25. While industry volumes were flattish over FY21-24, the upcoming crop cycles are expected to benefit Escorts Kubota, potentially driving double-digit growth from December to March.

Strategic Sourcing from India – A Key Growth Driver

The report highlights Kubota’s strategy to increase sourcing from India, targeting 15-20% of its global procurement by 2030, up from the current 9%. This initiative is critical for Escorts, as even a 5% shift in Kubota's sourcing could translate into a significant $500 million opportunity for the company. Additionally, global OEMs like CNH and John Deere are also enhancing their component sourcing from India, further solidifying India's position as a key manufacturing hub for agricultural machinery.

Exports to Play a Major Role in Growth Strategy

Escorts Kubota is working on multiple fronts to expand its exports business. Key initiatives include the launch of export-specific products in Europe by Q3 FY25 and the integration of Kubota’s global distribution network, which will facilitate channel expansion. The construction of a new greenfield plant, dedicated to tractors, engines, and implements, will further bolster its export capacity. This plant, with an investment of ₹45 billion, is expected to be a major driver of growth, with a focus on enhancing capacity for both domestic and international markets.

Financial Performance and Projections

For the fiscal year FY23, Escorts Kubota reported revenue of ₹83,450 million with an EBITDA margin of 9.4%. Emkay projects robust growth in the upcoming years, with revenue expected to reach ₹127,115 million in FY25 and ₹166,346 million by FY27, driven by both domestic and international markets. EBITDA margins are forecast to improve, rising to 14.1% by FY27, as the company benefits from better product positioning and operational efficiencies. The expected EPS for FY27 is ₹167.3, representing a compound annual growth rate (CAGR) of 16% over FY25E-27E.

Valuations and Competitive Metrics

Escorts Kubota is currently trading at 26x FY26E core Price-to-Earnings ratio, compared to a multiple of 30x for its peer M&M. While the stock has already risen significantly in the past year, the upside remains attractive with a projected 21.9% upside to the target price of ₹4,700. The company’s strong Return on Equity (RoE) and Return on Invested Capital (RoIC), both expected to exceed 14% in the coming years, make it a solid candidate for long-term growth.

Key Risks and Considerations

While the outlook for Escorts Kubota is positive, Emkay highlights certain risks that investors should keep in mind. These include potential slowdowns in export markets, as global economic conditions remain uncertain, and fluctuations in raw material costs that could impact margins. However, the company’s strong balance sheet, with net cash of ₹34,075 million projected for FY25E, provides a solid cushion against such risks.

Conclusion

With favorable macroeconomic conditions and a strategic alignment with Kubota's global sourcing plans, Escorts Kubota is poised for sustained growth. The recommendation to ‘BUY’ comes with a strong conviction, underpinned by the company’s efforts to tap into both domestic and export markets. Investors looking for a balanced growth stock with exposure to India's agricultural sector and global opportunities will find Escorts Kubota an attractive option.