Escorts Kubota Ltd continues to grapple with the challenges of weak export volumes and subdued construction equipment demand.
The company’s H1FY25 figures paint a bleak picture: total tractor volumes fell 3.6% year-on-year with domestic volumes falling by 2.5%. Construction equipment volume dropped 12.6%, and railway segment revenue contracted by 14.3%. However, the company expects demand trends to remain buoyant during H2FY25, going by its recent interactions with analysts at Kotak Institutional Equities.
“As per the company, domestic tractor industry is on track to achieve mid-single digit yoy growth in FY25. The company expects demand trends to remain buoyant during H2FY25, driven by high single-digit volume growth achieved during the festive season; continued recovery in southern and central regions due to higher reservoir levels; increase in MSP prices; and favourable terms of trade and base,” said a Kotak report on 16 December.
The domestic tractor market was up 4% year-on-year over April to November (FYTD25). Escorts has managed to increase its market share by 50 basis points (bps) to 11.7% during this period. However, distribution and product gaps continue to limit its potential.
Post RBI approval, Escorts is set to infuse up to ₹700 crore into its financing arm, aiming to reduce turnaround times and boost market share by an additional 80-100 bps. “This was an area where Escorts fell short compared to peers. The new finance arm is likely to provide added flexibility and support for tractor and construction equipment sales, aiding its market share,” Mitul Shah, analyst at Dam Capital Advisors, said.
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Persisting challenges
While that bodes well, exports are a challenge for Escorts, with tractor export volumes plunging 30% year-on-year in April-November. High inventory levels, weak used tractor prices, and adverse weather conditions have compounded the downturn. “The ongoing global export downcycle is likely to persist for a few more quarters before any signs of recovery emerge,” notes Shah.
Delayed product launches for the US market have further exacerbated the situation. To fight this, Escorts plans to enter new markets like Mexico and leverage India’s manufacturing cost advantages. The company also plans a ₹4,500 crore investment in a greenfield plant in Uttar Pradesh to expand production capacity and reduce dependence on imports. “The export for the American market and South America will largely depend on the greenfield facility,” said Bharat Madan, whole-time director and CFO, in a previous analyst meeting on 7 November.
The construction equipment segment has also struggled, with volumes declining 11% year-on-year in FYTD25 due to lower infrastructure spending and erratic monsoon patterns. Upcoming regulatory changes for non-road vehicles are expected to add cost pressures. However, potential government spending on infrastructure and Kubota Corporation’s expertise provide medium-term optimism.
In September, Escorts Kubota completed its integration with Kubota Agricultural Machinery India (KAI), aiming to enhance operational efficiency, streamline management, and diversify its product portfolio. The company said non-tractor revenue now accounts for around 17% to 19% of its overall agri-machinery revenue, compared to 10% to 12% pre-merger. Escorts aims for ₹1,000 crore in revenues each from spares, engines, and implements.
Despite strategic initiatives, valuation concerns persist. Kotak maintains a ‘sell’ rating on the stock, with a fair value of ₹3,000, projecting a 1% cut in FY25-27 earnings per share (EPS) due to elevated valuations. JP Morgan has an ‘underweight’ rating on Escorts with a target price of ₹2,745, forecasting a 10% like-for-like tractor volume CAGR from FY25 to FY27 and projecting Ebit margins to rise from 11.2% to 13.5% during the same period.
Investors seem to have taken cognizance of this. Escorts’ shares are down about 25% from their 52-week highs of ₹4,420 apiece seen on 27 September. While strategic investments and operational enhancements could unlock long-term value, consistent margin improvements and sustained market share gains are necessary for a potential stock re-rating.
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