Buy Calls – Escorts – 33% Gain Potential
Escorts
CMP: Rs 147
Target: Rs 195 (33%)
Investment: 12 months
Escorts has emerged leaner and stronger post its restructuring exercise, wherein it has exited unprofitable businesses and used the sale proceeds to reduce its debt burden from Rs8.8bn in FY05 to Rs4bn (gearing at 0.3x as of FY09). Core business segments (agri machinery, construction equipment and engineering equipment) are witnessing strong growth traction, and we see Escorts well-positioned to capitalize on the opportunity with adequate capacity and a new management in place. We expect 48% earnings CAGR for Escorts over FY09-12. Escorts’ priority from here would clearly be to optimize shareholder value by focusing on improving return ratios, targeting better working capital management and working on zero debt. Initiating coverage with Outperformer and a 12-month price target of Rs195 – 33% upside from CMP.
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