🔺 What to do when markets are at an all-time high? Find smart bargains, like these.See Undervalued Stocks

Escorts Kubota stock under pressure as BofA trims target post-merger impact

EditorEmilio Ghigini
Published 11/08/2024, 03:02 AM
ESCO
-

On Friday, BofA Securities adjusted its outlook on Escorts (NS:ESCO) Kubota Ltd (ESCORTS:IN), reducing the price target to INR3,250 from the previous INR3,600. The firm sustained its Underperform rating on the stock. The adjustment follows the conclusion of the merger between Kubota India subsidiaries (KAI & EKI) in the reported quarter, which impacted the company's financials.

The merger resulted in a decline of Escorts Kubota's EBIT margin to 9.1%, a notable decrease from the pre-merger range of 11-12%. While the margin dilution aligns with some expectations, the extent of the decrease was significant. The management of Escorts Kubota anticipates an EBIT margin normalization to 12-13% over the next 12 to 18 months, banking on product and cost improvements, as well as synergies from the merger.

The combined revenue of KAI & EKI, the merged subsidiaries, stood at Rs30B in F24, with a modest EBIT margin of approximately 2%, compared to Escorts' pre-merger EBIT margin of 11.4%. The overall reported Q2 EBIT for Escorts, including the merged business, showed a decline of 2% year-over-year even when adjusted for comparability. This was compounded by less than impressive earnings in the railways and construction equipment segments, which saw a 20% year-over-year decrease.

The analyst highlighted the importance of engine localization for Kubota products as a critical factor in achieving mid-teen margin levels. However, this is a long-term goal expected to take three to four years, as it is contingent on the development of a new greenfield plant, which has yet to begin.

In light of the recent financial performance and the challenges ahead, the valuation of Escorts Kubota stock at 32 times F26 earnings is seen as leaving little room for further disappointments, leading to the reiterated Underperform rating.

This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.

Latest comments

Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.