Escorts Initiate Coverage CS

30 November 2017
Asia Pacific/India
Equity Research
Automobile Manufacturers
Escorts Ltd (ESCO.BO)

Rating OUTPERFORM
Price (28-Nov-17, Rs) 688.30 INITIATION
Target price (Rs) 900.00
Upside/downside (%)
Mkt cap (Rs/US$ mn)
30.8
84,370 / 1,310
Multiple cylinders firing
Enterprise value (Rs mn) 81,135
Number of shares (mn) 122.58
■ Initiate with OUTPERFORM and TP of Rs900 (~30% potential upside).
Free float (%) 57.0 Escorts is the fourth-largest tractor manufacturer in India with a niche
52-wk price range (Rs) 772-280 construction equipment and railways business. Tractors account for 80% of its
ADTO-6M (US$ mn) 16.0 revenues and ~90% of its profits. We initiate coverage with an OUTPERFORM
Target price is for 12 months.
[V] = Stock Considered Volatile (see Disclosure Appendix)
rating Rs900 TP (18x Sep-19E), implying ~30% potential upside.
Research Analysts ■ Turnaround story with further legs. Escorts has successfully turned around in
Jatin Chawla the past few years by focusing on (1) new products to stabilise market share,
91 22 6777 3719 (2) cost reduction to improve tractor gross margins, and (3) shedding
jatin.chawla@credit-suisse.com unprofitable divisions. It is now focusing on the next phase of the turnaround
Vaibhav Jain where through a dual brand strategy (premium Farmtrac and mass Powertrac)
91 22 6777 3968
vaibhav.jain@credit-suisse.com
and aggressive distribution focus, it seeks to improve market share.
■ Only clean play on consolidated tractor industry. Despite two good years,
we believe the tractor cycle will remain strong for another two years. In the past
three decades, cycles have been 7-8 years long and with an 8% CAGR from
one peak to another. Assuming a seven-year cycle with a 5% CAGR would
imply 10% CAGR for the next three years. Escorts' FY17 EBIT margin at 10%
was still ~500-700 bp lower than the industry; it is targeting fixed cost reduction
to bridge the gap further. We expect tractor EBIT margins to improve from 10%
in FY17 to 14% in FY20, resulting in doubling of tractor EBIT in three years.
■ Fastest earnings growth, lowest valuations. Escorts' earnings growth
(FY17-20) of ~33% is the best amongst auto OEMs as fast top-line growth at
railways and margin turnaround in construction equipment division will
support tractors. Given surplus capacities across divisions, capex needs are
low, driving healthy FCF generation. Its multiple at 12.5x FY20E EPS
(adjusted for treasury shares) is the lowest amongst auto OEMs. We value it
at 18x (same multiple as Mahindra) Sep-19E P/E, which gives us a target
price of Rs900. Sustained margin improvement and further steps to improve
corporate governance should drive re-rating. Key risks are a sharp decline
in tractor volumes, rise in competitive intensity (John Deere), and lower
activity on construction and railways.
Share price performance Financial and valuation metrics
Year 3/17A 3/18E 3/19E 3/20E
Revenue (Rs mn) 40,931.6 45,835.1 51,967.7 57,982.7
EBITDA (Rs mn) 3,237.1 5,002.6 6,093.2 7,371.1
EBIT (Rs mn) 2,606.4 4,303.0 5,358.2 6,600.9
Net profit (Rs mn) 1,973.9 3,087.2 3,803.0 4,685.4
EPS (CS adj.) (Rs) 23.15 36.20 44.59 54.94
Change from previous EPS (%) n.a. - - -
Consensus EPS (Rs) n.a. 29.88 37.66 43.85
EPS growth (%) 97.8 56.4 23.2 23.2
The price relative chart measures performance against the P/E (x) 29.7 19.0 15.4 12.5
S&P BSE SENSEX IDX which closed at 33,618.59 on Dividend yield (%) 0.2 0.3 0.4 0.4
28/11/17. On 28/11/17 the spot exchange rate was EV/EBITDA (x) 25.6 16.0 12.5 9.7
Rs64.4/US$1 P/B (x) 2.95 2.61 2.27 1.95
Performance 1M 3M 12M ROE (%) 10.3 14.6 15.7 16.7
Absolute (%) -6.6 10.9 116.5 Net debt/equity (%) (6.7) (18.6) (30.7) (41.8)
Relative (%) -8.0 4.7 89.0 Note: EPS and P/E numbers adjusted for treasury shares. Source: Company data, Thomson Reuters, Credit Suisse estimates
DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST
CERTIFICATIONS, LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit
Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware
that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report
as only a single factor in making their investment decision.
30 November 2017
Focus charts and tables

Figure 1: Cycle suggests that tractor demand likely Figure 2: Market share fall got arrested with new
to grow at 10% for next 2 years; we assume lower launches—now focus on gaining share
120,000 18%
Tractors cycles Length of cycle (yrs.) Volume CAGR
17%
100,000 16%
FY85-92 7 9%
80,000 15%
FY92-00 8 9% 14%
60,000 13%
FY00-07 7 2% 12%
40,000 11%
FY07-14 7 11% 10%
20,000
9%
Estimate of potential growth - 8%
18MFY14
FY04-Jun
FY05-Sep
FY06-Sep
FY07-Sep
FY08-Sep
FY09-Sep
FY10-Sep
FY11-Sep
FY12-Sep
FY02
FY03
FY15
FY16
FY17
FY14-21E vol. CAGR 7 5%
FY21E vol. 890,000
Escorts - domestic tractor volumes Market share(RHS)
Implied FY17-21E CAGR 11%
Source: Industry data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
Figure 3: M&A activity has consolidated tractor Figure 4: Escort's EBIT margins still ~500 bp lower
industry; resulting in better EBIT margins than industry; lot of scope to improve
100% 21.0
8% 6%
14% 8%
6%
29% 4%
80% 12% 11% 18.0
14%
5% TAFE 10% 13%
bought 12% M&M 15.0
60% 14%
Eicher bought
25% 21%
Punjab 12.0
11% 24% Tractors
40%
13%
9.0
20% 41% 43%
28% 32% 6.0
FY11 FY12 FY13 FY14 FY15 FY16 FY17
0%
FY04 FY07 FY13 FY17
EBIT % of Escorts - tractors (%) M&M tractors
Mahindra TAFE International tractors Escorts John Deere Others
Intl. tractors (Sonalika)
Source: Industry data, Credit Suisse estimates Source: Industry data, Credit Suisse estimates
Figure 5: Construction margins to improve with Figure 6: Escorts has fastest earnings growth and
cycle and cost reduction efforts lowest multiple amongst Indian Auto OEMs
800 10.0 40.0 40%
8.0 35.0 35%
600
6.0
400 30.0 30%
4.0
200 25.0 25%
2.0
- 20.0 20%
-
(2.0) 15.0 15%
(200)
(4.0)
10.0 10%
(400)
(6.0)
5.0 5%
(600) (8.0)
FY14*
FY18E
FY19E
FY20E
FY07
FY08
FY09
FY10
FY11
FY12
FY15
FY16
FY17
- 0%
Bajaj Hero TVS Maruti M&M Eicher Escorts
Construction equip. EBIT (Rs mn) EBIT margin (RHS) FY19 PE (X) FY20 PE (X) FY17-20 EPS CAGR (RHS)
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
Escorts Ltd (ESCO.BO) 2

30 November 2017
Multiple cylinders firing

Margin focus, business sale have led to turnaround
Divested multiple Escorts is the fourth-largest tractor manufacturer in the country. It also has a niche
business in early 2000s construction equipment and railways business. It had a very difficult phase in the early
2000s, which forced it to exit a number non-core businesses such as hospitals and
telecom. The focused turnaround started in FY12 when the company started investing in
new products. It invested Rs4 bn over three years to revamp a product portfolio that has
not seen the required investments for almost a decade. This helped Escorts halt the slide
Tractor gross margins in market share, which has stabilised over the past few years. It engaged McKinsey as a
improved ~500 bp in consultant to focus on improving gross margins, which improved ~500 bp over the last six
the last six years
years; albeit also partially aided by lower commodities and a favourable tractor cycle.
Favourable cycle, market share focus to drive growth
Expect tractor cycle to Despite two good years, the tractor cycle is likely to remain supportive for another couple
remain favourable for of years. In the past three decades, cycles have been seven to eight years long, and with
two more years an ~8% CAGR from one peak to another. Assuming a seven-year cycle with a 5% CAGR
would imply 10% growth in volumes for the next three years. We build in 10%/5% for
FY19/FY20 for the sector, and 12%/8% for Escorts. FY19 will be supported by pre-general
election spending in rural areas.
Expanding product In the second phase of the turnaround, the company's focus is on improving its market
portfolio and reach to share in tractors as it seeks to get back to the 13-14% market share from 10.5% currently.
improve share by ~300- Escorts has not only filled white spaces in its product portfolio, but also extended both its
400bps brands—premium Farmtrac (towards lower horsepower (hp)) and mass segment
Powertrac (towards higher hp). The lack of suitable products had hurt its export volumes,
but with new products, management expects to increase exports from 1,000 units in FY17
to 8,000-10,000 by FY22. It is aggressively expanding distribution by focusing on taking
Powertrac deeper in its weaker geographies (South and West). The margin focus has now
shifted from gross margins to other expenses as it targets a 200-300 bp improvement by
improving shopfloor productivity, combining back-end functions across divisions, etc.
Railways another growth engine; CE cycle positive
Railways orderbook up Its investment in new products has paid off in railways too, with the orderbook steadily
4x in last two years rising from Rs0.6 bn in FY16 to Rs2.8 bn now. With only three of the seven new products
launched, railways should help scale top line to ~Rs5 bn by FY20. Material cost reduction
efforts are now focused on the construction equipment side, whereby the endeavour is to
take if from negative EBIT to double digit EBIT; the cycle is supportive here too, with 15-
30% growth in the past two years. We expect the ~15% CAGR to continue for the next two
to three years. Although Escorts is targeting a double-digit EBIT margin here, we build in
6.0% in FY20.
Fastest EPS growth, lowest valuations in space
Initiate with a TP ofEscorts' earnings growth (FY17-20) of ~33% is the best amongst auto OEMs and trades at
Rs900, ~30% upside the lowest multiple among all stocks. Earnings growth will be driven by double-digit top-
line growth and steady ~100 bp margin expansion every year. With surplus capacities
across segments, it has limited capex needs and hence FCF generation will be very strong
and ROCEs should improve to a healthy 20% level by FY20. We see Escorts' story similar
to TVS with expectations of both market share and margin catch-up to industry levels.
Whilst Escorts' trades at 12.5x FY20E, TVS trades at 30x. We value Escorts at 18x (10%
discount to our multiple for TVS which has a superior corporate governance perception).
The key risks to our call are a sharp decline in tractor volumes and a rise in competitive
We see the Escorts intensity (John Deere). Escorts has a third of its stock as treasury stock created from the
story similar to TVS merger of the construction equipment business—we adjust this in the number of shares to
derive our target price of Rs900.

30 November 2017
Escorts Ltd (ESCO.BO / )

Price (28 Nov 2017): Rs688.30; Rating: OUTPERFORM; Target Price: Rs900.00; Analyst: Jatin Chawla
Income Statement (Rs mn) 03/17A 03/18E 03/19E 03/20E Company Background
Sales revenue 40,932 45,575 51,699 57,716 Escorts manufactures tractors and agri equipment, construction
Cost of goods sold 27,924 30,291 34,361 38,360 equipment and railways equipment in India.
EBITDA 3,237 4,838 6,047 7,312
EBIT 2,606 4,139 5,312 6,541 Blue/Grey Sky Scenario
Net interest expense/(inc.) 311 329 315 315
Recurring PBT 2,730 4,310 5,556 6,853
Profit after tax 1,974 2,974 3,834 4,728
Reported net profit 1,974 2,974 3,834 4,728
Net profit (Credit Suisse) 1,974 2,974 3,834 4,728
Balance Sheet (Rs mn) 03/17A 03/18E 03/19E 03/20E
Cash & cash equivalents 3,972 6,698 10,503 15,188
Current receivables 4,580 5,100 5,786 6,460
Inventories 4,295 4,782 5,425 6,057
Other current assets 1,354 1,490 1,639 1,803
Current assets 14,201 18,070 23,353 29,507
Property, plant & equip. 15,778 15,738 15,663 15,553
Investments 4,187 4,187 4,187 4,187
Intangibles 0 0 0 0
Other non-current assets 966 966 966 966
Total assets 35,132 38,961 44,168 50,213
Current liabilities 12,592 13,972 15,713 17,470
Total liabilities 15,220 16,600 18,341 20,098
Shareholders' equity 19,912 22,361 25,827 30,114
Minority interests 0 0 0 0
Total liabilities & equity 35,132 38,961 44,168 50,212
Cash Flow (Rs mn) 03/17A 03/18E 03/19E 03/20E
EBIT 2,606 4,139 5,312 6,541
Net interest 435 500 560 627
Tax paid (756) (1,336) (1,722) (2,124) Our Blue Sky Scenario (Rs) 1,000
Working capital 1,048 237 263 288 Higher volume growth with higher than expected margin expansion
Other cash & non-cash items 631 470 735 770
Operating cash flow 3,963 4,009 5,147 6,102 Our Grey Sky Scenario (Rs) 540.00
Capex (107) (660) (660) (660) 10% lower earnings and lower multiple of 12X on earnings
Free cash flow to the firm 3,857 3,349 4,487 5,442
Investing cash flow (138) (660) (660) (660) Share price performance
Equity raised 151 0 0 0
Dividends paid (221) (294) (368) (441)
Financing cash flow (1,358) (623) (683) (757)
Total cash flow 2,468 2,726 3,804 4,685
Adjustments 0 0 0 0
Net change in cash 2,468 2,726 3,804 4,685
Per share 03/17A 03/18E 03/19E 03/20E
Shares (wtd avg.) (mn) 85 85 85 85
EPS (Credit Suisse) (Rs) 23.15 34.87 44.95 55.44
DPS (Rs) 1.50 2.00 2.50 3.00
Operating CFPS (Rs) 46.47 47.01 60.36 71.55
Earnings 03/17A 03/18E 03/19E 03/20E
Growth (%)
Sales revenue 17.9 11.3 13.4 11.6
EBIT 172.1 58.8 28.3 23.1 The price relative chart measures performance against the S&P BSE SENSEX
EPS 97.8 50.7 28.9 23.3 IDX which closed at 33,618.59 on 28-Nov-2017
Margins (%) On 28-Nov-2017 the spot exchange rate was Rs64.4/US$1
EBITDA 7.9 10.6 11.7 12.7
EBIT 6.4 9.1 10.3 11.3
Valuation (x) 03/17A 03/18E 03/19E 03/20E
P/E 29.7 19.7 15.3 12.4
P/B 2.95 2.63 2.27 1.95
Dividend yield (%) 0.2 0.3 0.4 0.4
EV/sales 2.0 1.8 1.5 1.2
EV/EBITDA 25.6 16.6 12.7 9.8
EV/EBIT 31.9 19.4 14.4 11.0
ROE analysis (%) 03/17A 03/18E 03/19E 03/20E
ROE 10.3 14.1 15.9 16.9
ROIC 9.9 15.5 20.2 25.4
Credit ratios 03/17A 03/18E 03/19E 03/20E
Net debt/equity (%) (6.7) (18.2) (30.5) (41.7)
Net debt/EBITDA (x) (0.42) (0.84) (1.30) (1.72)
Source: Company data, Thomson Reuters, Credit Suisse estimates

30 November 2017
Margin focus drove turnaround

Escorts is the fourth-largest tractor manufacturer in India. It also has a niche construction
equipment and railways business. It had a very difficult phase in the early 2000s, which
forced it to exit a number of non-core businesses, such as hospitals and telecoms. The
focused turnaround started in FY12 when the company started investing in new products.
It invested Rs4 bn over three years to revamp a product portfolio which has not seen the
required investments for almost a decade. This helped Escorts halt the slide in market
share which has stabilised in the last few years. It engaged Mckinsey as a consultant to
focus on improving gross margins which improved ~500 bp over the last six years; albeit
also partially aided by lower commodities and a favourable tractor cycle.
Figure 7: Brief history of Escorts till date
Source: Company data
Group has shed unprofitable ventures

Tough period in early 2000s led to the group exiting multiple business
Escorts passed through a very tough phase in the early 2000s as the company's
diversification into telecom, IT, etc., turned out to be unsuccessful. Problems were
compounded by a sharp slowdown (three successive bad monsoon) and the rise in
competitive intensity (as MNC players entered India post the sector opening up) in its cash
cow agri business. During this phase, the group struggled to repay its debt, resulting in the
company being forced to sell off its hospital, telecoms and IT businesses. It also meant no
investment in new products for a long time.

30 November 2017
Figure 8: Early 2000s period saw losses in multiple segments, including Agri
machinery and telecom forcing group to exit multiple non-core businesses
6,000 6,000
5,000 5,000
4,000 4,000
3,000 3,000
2,000 2,000
1,000 1,000
- -
(1,000) (1,000)
(2,000) (2,000)
FY04-Jun
18MFY14
FY05-Sep
FY06-Sep
FY07-Sep
FY08-Sep
FY09-Sep
FY10-Sep
FY11-Sep
FY12-Sep
FY03
FY15
FY16
FY17
Agri-machinery EBIT (Rs mn) Construction Equipment Auto Ancillary
Other Operations Telecom Railway Equipments
Healthcare Total (RHS)
Source: Company data, Credit Suisse estimates
Sold its loss making auto component business last year

Escorts sold its auto component business assets which has been making losses for many
years to Badve Engineering in an all-cash deal for Rs180mn in Aug-2016, the cash being
largely used to settle liabilities. The auto component business has struggled for multiple
years with revenue stagnant at Rs1 bn for almost a decade and making a double-digit
EBIT margin loss.
Figure 9: Auto components was loss making at EBIT level for past ten years
2,500 0%
2,000 -5%
1,500 -10%
1,000 -15%
500 -20%
- -25%
FY07-Sep FY08-Sep FY09-Sep FY10-Sep FY11-Sep FY12-Sep 18MFY14 FY15 FY16 FY17
Auto segment revenues (Rs mn) EBIT margin (RHS)

30 November 2017
Investments in products have helped stem share

loss
Lack of investment in products led to decline in market share
Given the issues that the company was facing in its other divisions, it struggled to invest
properly in the core tractors business. This lack of investments resulted in a sharp decline
in market share.
Figure 10: Escorts cut down on capex in FY04-07; focus back on new products
in FY11-14 period
2,000
Escorts cut down on capex, dividend Capex spend in FY12-14 on new products, R&D
payout during FY04-07
1,500
1,000
500
(500)
FY04-Jun
18MFY14
FY05-Sep
FY06-Sep
FY07-Sep
FY08-Sep
FY09-Sep
FY10-Sep
FY11-Sep
FY12-Sep
FY02
FY03
FY15
FY16
FY17
Capex (net of sale) (Rs mn) Dividend outflow
Figure 11: Lack of investments in new products led to a sharp decline in market
share from 15%+ to ~10% levels; share loss stabilised now
120,000 18%
17%
100,000
16%
15%
80,000
14%
60,000 13%
12%
40,000
11%
10%
20,000
9%
- 8%
FY04-Jun
18MFY14
FY05-Sep
FY06-Sep
FY07-Sep
FY08-Sep
FY09-Sep
FY10-Sep
FY11-Sep
FY12-Sep
FY02
FY03
FY15
FY16
FY17
Escorts - domestic tractor volumes Market share(RHS)

30 November 2017
Strong margin improvement in tractors

Escorts' tractor segment EBIT margins were the lowest in the industry. Despite a steady
improvement in the past two years, there is still a big gap between Escorts and industry
leaders such as Sonalika and Mahindra who enjoy ~20% margins. The main gap was on
gross margins and employee costs; gap on gross margins is largely closed now.
Figure 12: Escorts’ current profitability much lower than competition; there is
enough room to improve margins
21.0
18.0
15.0
12.0
9.0
6.0
FY11 FY12 FY13 FY14 FY15 FY16 FY17
EBIT margin of Escorts - tractors (%) M&M tractors Intl. tractors (Sonalika)
Escorts numbers based on quarterly results for FY11-14 period. Source: Company data, Capitaline
In June 2014, the company started Project Shikhar with McKinsey to focus on improvement
in gross margins. Firstly, Escorts rationalised the number of suppliers and reduced them by
25%. Furthermore, its R&D team worked on the design of the vehicles to come up with less
expensive models/raw materials, which could provide similar level of strength and
performance. Over the years, tractors had started carrying features which customers no
longer valued and those were removed. RM cost optimisation is clearly visible in the past
three-four years although the sharp fall in FY16 was aided by decline in commodity prices.
Figure 13: Gross margins improved ~500 bp largely on focused reduction effort
50,000 74.0%
40,000 72.0%
30,000 70.0%
20,000 68.0%
10,000 66.0%
- 64.0%
FY04-Jun
18MFY14
FY05-Sep
FY06-Sep
FY07-Sep
FY08-Sep
FY09-Sep
FY10-Sep
FY11-Sep
FY12-Sep
FY03
FY15
FY16
FY17
1H18
RM cost (Rs mn) RM cost as % of sales (RHS)

30 November 2017
Apart from its own cost reduction efforts, gross margin improvement in the last few years
has been driven by lower commodity prices (steel and rubber are most relevant for
tractors) and operating leverage (as industry volumes saw a cyclical bounce).
Figure 14: Low commodity prices have helped Figure 15: Demand growth in FY17 provided
margins in last few years but at same level as FY11 tailwind for volumes, operating performance
40 250 750 45%
600 30%
35 200
450 15%
30 150
300 0%
25 100
150 -15%
20 50
- -30%
Apr-08
Apr-09
Apr-10
Apr-11
Apr-12
Apr-13
Apr-14
Apr-15
Apr-16
Apr-17
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
Steel (Rs/Kg) Rubber (Rs/ Kg) Tractors' domestic volumes ('000) % yoy (RHS)
Source: Bloomberg, Credit Suisse estimates Source: Tractor Manufacturers Association, Credit Suisse estimates
High share of high cost permanent workers distorts cost structure

The other big issue with Escorts' cost structure is higher employee costs. Over the last few
decades with the multiple cost increases given to its blue collar workers their salaries are
now 5-6x more than the contract workers deployed for the same task. Also, given the low
volume growth Escorts has not been able to add contract workers as aggressively as the
other players and the share of contract workers is only 60%, it is ~80% in other auto
plants. The company plans to use VRS (Voluntary Retirement Schemes) and natural
retirement to reduce the number of permanent blue-collar employees from 2,200 to 1,200
over the next few years with a reduction of 600 planned from VRS and a reduction of 400
planned from natural retirement.
VRS plan launched in The company had come out with a Voluntary Retirement Scheme (VRS) recently in 1H
2Q FY18 saw poor FY18 (in addition to earlier schemes introduced in FY15), but the scheme didn’t find much
response acceptance with only 35 employees taking the same. As per management, they don’t
expect a revised scheme to be launched over next 18 months, and will take a decision
post that. Hence, the target of reduction of 600 employees from VRS might not be
achieved. Whilst earlier the company was targeting to bring down employee costs as a
percentage of sales down from 10.5% to 8% it now expects it to come down to only 9%.
The company is hopeful that once it expands capacity, some of the excess manpower can
be absorbed there as well.

30 November 2017
Favourable cycle, market share focus to

drive growth
Despite two good years, the tractor cycle is likely to remain supportive for another couple
of years. In the past three decades, cycles have been seven to eight years long, with an
~8% CAGR from one peak to another. Assuming a seven-year cycle with a 5% CAGR
would imply 10% growth in volumes for the next three years. We build in 10%/5% for
FY19/FY20; FY19 will be supported by pre-general election spending in rural India.
In the second phase of the turnaround, the focus is on improving its market share in
tractors as it seeks to get back to the 13-14% market share from 10.5% currently. Not only
has Escorts filled white spaces in its product portfolio it has also extended both its brands
premium Farmtrac (towards lower hp) and mass segment Powertrac (towards higher hp).
It is aggressively expanding distribution by focusing on taking Powertrac deeper in its
weaker geographies (South and West). Also, Powertrac and Farmtrac have their own
respective strongholds in the Northern and Eastern markets, and the company is setting
up separate distribution channel for the weaker brand in these markets. The margin focus
has now shifted from gross margins to other expenses as it targets a 200-300 bp
improvement by improving shopfloor productivity, combining back-end functions across
divisions among others.
Tractor cycle will remain supportive

Cycle suggests that demand can remain healthy for another two years
We look at tractor demand pattern over the past three decades and compare growth rates
from one peak to the next peak to get an understanding of the current cycle. Cycles have
been seven to eight years with growth rates of 9-11% in three of the four cycles in the past
three decades. In the first two cycles (FY85-92 and FY92-00), volume growth averaged at
9% p.a. However, the subsequent period (FY00-07) did not see the same growth rates as
FY02-03 periods were characterised with strong declines along with very weak monsoons.
This weaker growth in the FY00-07 period possibly helped create a lower base for FY07-
14 growth, which came at a strong 11% CAGR; this was also supported by the strong pro
rural policies of UPA-2 government.
Figure 16: Cycles typically last 7-8 years; volume CAGR over past two cycles
was 6.4% p.a.
Tractors cycles (peak to peak) Length of cycle (years) CAGR cycle
FY85-92 7 9%
FY92-00 8 9%
FY00-07 7 2%
FY07-14 7 11%
Source: Industry data, Credit Suisse estimates
Even a ~5% growth in current cycle implies 10% growth for next 3 years
In order to estimate likely volume growth trend over the current cycle (FY14-21E), we first
look at average growth trend over the past two cycles (to smoothen the impact), which
was 6.4% over FY00 to FY14. In the current cycle, we have seen two weak years (FY15,
FY16) leading to a 22% decline from peak, followed by two strong growth years in FY17
(18%) and FY18E (~14% growth) leading to the industry crossing the previous peak. If we
assume that this cycle (FY14-21) will see 5% CAGR (lower than 6.4% seen over FY00-14
and much lower than recent FY07-14 CAGR of 11%), volumes could peak at ~900k in
FY21E. This level implies 10% CAGR from FY18-21E.
In addition to the cycle, we see additional factors being supportive for tractor demand in
FY19E. These include benefits from farm loan waiver (states accounting for ~65% of

30 November 2017
tractor volumes have seen farm-loan waiver), pre-general election spend by government
and continuation of infra spending. Based on these tailwinds, we believe that our
expectation of 10% volume growth in FY19E should pan out. Post FY19E, we build
moderation in volume growth to 5% even though if cycle were to play out in line with past
trends, there could be positive surprise on growth. However, the disruption in government
capex during elections, and any changes post the elections can have an impact on infra
capex during FY20E, which may act as a dampener in demand, especially after three
years of reasonable growth in volumes.
One year of weak monsoons doesn’t impact growth trend materially
Another factor in tractor demand is related to monsoons. We highlight that if monsoons fail
successively over two years, demand tends to fall down materially. On the other hand, if
deviation is not large (in 0-5% range), it doesn’t impact tractor demand as much. In FY17
and FY18, rainfall has seen small deviations from normal level while the cycle has been
supportive (recovery from de-growth years of FY15 and FY16). Going forward, unless
monsoons are below normal for two years in succession, we believe that volume traction
should remain healthy in FY19 and FY20.
Figure 17: Successive failures of monsoons can impact demand

30% 20%
15%
20%
10%
10%
5%
0% 0%
-5%
-10%
-10%
-20%
-15%
-30% -20%
FY18E
FY89
FY90
FY91
FY92
FY93
FY94
FY95
FY96
FY97
FY98
FY99
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
Tractors growth Rainfall deviation from normal
Source: Company data, Indian Met Department, Credit Suisse estimates
Figure 18: Reservoir levels improved in FY17 as compared to FY16

70.0 80
60.0 64
50.0 48
40.0 32
30.0 16
20.0 0
10.0 -16
- -32
FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17
Live storage in TM CUM YoY change (%, RHS)
CUM – Cubic. M. Source: CMIE, Credit Suisse estimates

30 November 2017
Opportunity to gain market share exists

Fairly consolidated tractor market
The Indian tractor market is fairly consolidated with the top five tractor manufacturers
accounting for ~95% of overall tractor volumes. The Indian tractor industry used to be
fairly competitive till FY04 when manufacturers would frequently compete on pricing
causing margin declines when tractor industry volumes would go down. However, TAFE's
acquisition of Eicher in 2005 and Mahindra's acquisition of Punjab Tractors in 2009 have
consolidated the industry. M&A has been the main reason for the change in market share
in the industry. In the past two years however, TAFE has started losing some share to
M&M & John Deere.
Figure 19: Tractor industry has got consolidated by M&A activity

100%
8% 6%
14% 8%
6%
29% 4%
80% 12% 11%
14%
5% 10% 13%
TAFE M&M
60% 12%
14% bought bought
Eicher Punjab 25% 21%
11% Tractors
24%
40%
13%
20% 41% 43%

28% 32%
0%
FY04 FY07 FY13 FY17
Mahindra TAFE International tractors Escorts John Deere Others
Figure 20: Brief profile of the key tractor manufacturers in India

Manufacturer Brief history
Mahindra & Mahindra Started manufacturing tractors in 1965 as a JV with International Harvester, US. This JV was merged with
M&M in 1977. Has been the market leader since 1983. Further consolidated its position with the acquisition
of Punjab Tractors in 2009.
TAFE TAFE is part of the Amalgamation group. Established in 1961 to market and manufacture range of Massey
Fergusson tractors; it has continued with this tie-up. Acquired Eicher's tractor business in June 2005.
Escorts Promoted by the H.P. Nanda Group, Escorts commenced local manufacture of Ford tractors in 1971 in
collaboration with Ford, UK. In 1992, Ford was sold, but Escorts was allowed to use its label as per an
agreement. In 2000, Escorts relabelled its models under the Escorts brand.
International Tractors ITL was incorporated in October 1995 under the ownership of the Mittals. It manufactures tractors under
the brand name Sonalika Tractors. Has a very low cost base as plant in Hoshiarpur
John Deere John Deere Equipment Pvt Ltd is an Indian subsidiary of Deere & Co, USA. It was initially set up as a JV
between Larsen & Toubro and Deere, but in 2005, Deere acquired nearly all the shares from L&T.
New Holland New Holland Tractor, a 100% subsidiary of Case New Holland Tractors, Italy, started manufacturing
tractors in India in 1998. It has not found much success in the market.
Source: Company data, Credit Suisse Research
Post the industry consolidation, there has been a visible improvement in the profitability of
the tractor industry especially during a down cycle. In the previous downcycle in FY08 and
FY09, industry margins declined to ~10% EBIT margin levels. Whilst in the previous
downcycle in FY15/FY16; EBIT margins declined only marginally to ~15% EBIT margin.

30 November 2017
Figure 21: With industry consolidation, EBIT margins even in a downturn don’t
decline much and much higher than previous downturns
25%
20%
15%
10%
5%
0%
FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17
International Tractors Mahindra tractors segment
Escorts lost market share till FY15; gained 50 bp in FY17

Market is moving away from Escorts' strength areas
Escorts has a stronghold in the Northern and Eastern market with double digit market
share in large markets of Haryana, Punjab, Rajasthan, UP, Bihar, MP and smaller markets
of HP, WB, Assam. Its weakness is the Southern and Western markets of Gujarat, Andhra
Pradesh, Maharashtra, Karnataka, Tamil Nadu. The Northern markets were part of the
green revolution of the 1970s and hence farmers in these markets have had higher
income and hence tractor affordability. Tractor penetration in some of these states has
peaked and demand is coming largely from replacement. As a result, the mix of these
markets is going down which is hurting Escorts.
Escorts also has a lower share in the >50hp segment. Given the lack of investments into
new products as typically products in this segment tend to be the most premium and
advanced, Escorts had a very low share of 1.6% in this segment previously.
Figure 22: South & West are half the market for Figure 23: … but they are ~30% of Escorts' volumes
Escorts… hence providing an opportunity
Region wise market composition Region wise Escorts' volumes
West
West 24%
32% North
37%
North
East 54%
15%
East
14%
South South
17% 7%
Source: Industry data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

30 November 2017
Figure 24: 41-50HP segment accounts for ~50% of Figure 25: Share of Escorts' stronghold North has
market up from 27% in FY12 been gradually coming down on higher penetration
100 100
6 8 10 8 5 6 7 7
11 12 13
25 30
22 32 33 33 35 33 33
80 24 23 80
23
28 27 38
49 46 46 49 14
60 60 13 12 13 13 15 14
13
19
53 51 20 19 14 13 14 19
40 50 48 19
44 46 40
44
35 37 37 35
20
20 42 40 39 40
35 36 36 34
18 18 17 17 15 15 10 11 11 11 9
0
FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 -
FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17
Upto 30hp 31-40 hp 41-50 hp >51 hp North South East West
Source: Tractor Manufacturers Association, Credit Suisse estimates Source: Company data, Credit Suisse estimates
Figure 26: Escorts has witnessed a ~1% market share improvement across
regions but overall improvement only 30 bp as weaker regions have grown faster
25%
20%
15%
10%
5%
0%
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
North South East West Total
New product launches now plugging in whitespaces

On the product side, the first phase of launches involved launching products where the
company has traditionally been strong but lost relevance because of lack of investment in
new products. The best example here is the >50hp segment where Farmtrac traditionally
used to have a big advantage but completely lost out because of lack of new launches;
with that addressed (and readdressed as product issues sorted with T20 launch) its share
in that segment is now starting to grow again. The T20 is an innovative product with 20
gears which enables the farmer to shift towards a lower power mode when not doing
heavy duty stuff and thus results in fuel saving.
Escorts has a two brand strategy for the market like the top two players Mahindra
(Mahindra & Swaraj) and TAFE (TAFE and Eicher). Escorts positions the Farmtrac brand
as a premium offering and Powertrac as a mass offering. Also, Farmtrac is more suitable
for dry land applications whilst Powertrac is more suitable for wet land applications. Both
of them have completely separate geographical areas where they are strong.

30 November 2017
Extending Farmtrac The second phase which is currently in progress is filling the whitespaces in the two
towards lower different brands. Traditionally, Farmtrac has been a >45hp market and has not addressed
horsepower and 50% of the market. Since FY16, the company has been launching products to extend the
Powertrac towards Farmtrac range from 31-45hp markets. Similarly, Powertrac traditionally was a <40hp
higher horsepower brand and efforts have been made to extend the brand till 60hp. Escorts has also recently
launched 22-28hp compact tractors to address the orchard and vineyards segment
(market size of 20k p.a.) in a segment it has never addressed before.
The other focus on the product side has been on expanding the product range to 110hp
and to CRDI engines for the export markets.
Figure 27: With a series of launches since 2HFY15, Escorts has almost
completely refreshed its entire product portfolio
Two brands under Category HP Farmtrac/Powertrac Model Launch Quarter
Powertrac – Euro and Personnel Tractor 31-40 Powertrac Powertrac Euro 37 1QFY16
Alt 31-40 Powertrac Powertrac Euro 41 1QFY16
41-50 Powertrac Powertrac Euro 45 2QFY16
41-50 Powertrac Powertrac Euro 50 2QFY16
50+ Powertrac Powertrac Euro 60 3QFY17
Anti-Life Tractors (ALT) 31-40 Powertrac-ALT Powertrac ALT 3500 4QFY15
31-40 Powertrac-ALT Powertrac ALT 4000 4QFY15
Four different sub- XP Series 31-40 Farmtrac Farmtrac XP37 3QFY15
brands under Farmtrac 31-40 Farmtrac Farmtrac XP41 3QFY15
Classic Series 41-50 Farmtrac Farmtrac Classic 45 1QFY16
41-50 Farmtrac Farmtrac Classic 60 1QFY16
41-50 Farmtrac 6055 T20 Classic 3QFY17
50 HP+ Farmtrac Farmtrac 6055 Classic 3QFY16
Executive Series 50 HP+ Farmtrac Farmtrac 6050 3QFY15
50 HP+ Farmtrac Farmtrac 6050 4X4 3QFY15
50 HP+ Farmtrac Farmtrac 6055 4QFY15
50 HP+ Farmtrac 6065 Executive series 3QFY17
Heritage series 50 HP to 75 HP Farmtrac Farmtrac Heritage series 3QFY15
(6050, 6060, 6075)
Compact tractor 22-30 HP Farmtrac 22-28 HP 2QFY18
Focused distribution in weak markets; other brand in strong markets

On the channel side, the company has plans to expand its network in both the strong
markets (North and East) as well as opportunity markets (South and West). Currently,
Escorts has 850 dealers (1,000 touchpoints) with 60% of those in strong markets and 40%
in opportunity markets. In the strong markets, it has plans to set up Farmtrac dealerships
where Powertrac is strong and vice-e-versa. In the opportunity markets – predominantly
South – the idea is to expand using the Powertrac brand since it is a mass market brand
and also with its suitability for wet land applications more suited for the Southern market.
Rather than increasing the sheer number of dealers, the company is focused on improving
the dealer quality by working in a focused manner with identified dealers and training them
and offering them support to improve share in their respective regions. Through these
focused efforts it has managed to gain share in some weak regions like Gujarat,
Maharashtra, etc. In order to further expand its reach and service capability it has also
started converting local mechanics to multibrand service stations called Escorts Tractor
Care. It already has over 300 of these across the country. This is also helping it grow its
spare parts sales faster than the industry.

30 November 2017
The company tied up with the Indian subsidiary of Rabo Bank DLL (De Lage Landen) India
to launch Escorts Credit to provide faster loans to its customers from its dealerships. This
arrangement has helped the company bring down the average approval for a loan down
from a week to less than a day.
Large exports opportunity provides room to scale up

Escorts is also working towards improving its exports franchise. The company used to have
15-20% market share in tractor exports from India till FY07. However, with the sharp
currency appreciation in FY08, profit margins got severely impacted in its exports business,
where the US used to be a key market. Subsequent years were pretty challenging for US
market (post GFC), and the company chose to focus on other markets. However, when the
market revived, Escorts didn’t keep pace with the product changes, and hence lost out on its
market share. In recent times, the company has invested in launching new products and is
focusing on growing its exports volumes. The growth is visible in recent past with 1HFY18
volume growth of 140% YoY. Given the large opportunity (~80,000 tractors exports from
India) and small market share of Escorts currently, there is room for strong growth over
many years. The company is targeting export volumes of between 8,000 and 10,000 units by
FY22; we build in ~4,000 units in FY20.
Figure 28: Escorts is working towards increasing its market share in exports
markets; volume growth can be strong on a low base
120,000 25%
100,000
20%
80,000
15%
60,000
10%
40,000
5%
20,000
- 0%
FY18E
FY19E
FY20E
FY04-Jun
FY05-Sep
FY06-Sep
FY07-Sep
FY08-Sep
FY09-Sep
FY10-Sep
FY11-Sep
FY12-Sep
18MFY14
FY02
FY03
FY15
FY16
FY17
Tractor exports of Escorts India exports As % of total
Source: Company data, Tractor Manufacturers Association, Credit Suisse estimates

30 November 2017
Railways a growth engine; CE cycle positive

Its investment in new products has paid off in railways too, with order-book steadily rising
from Rs0.6 bn in FY16 to Rs2.8 bn now. With only three of the new seven products
launched, railways should scale to ~Rs5 bn topline by FY20. Material cost reduction efforts
are now focused on the construction equipment side, whereby the endeavour is to take it
from negative EBIT to double digit EBIT; the cycle is supportive here too with 15-30% growth
in the past two years. We expect ~15% CAGR to continue for the next 2-3 years. Whilst
Escorts is targeting a double-digit EBIT margin here, we build in 7.5% in FY20.
New product investments benefit in Railways also

Escorts has been in the railways equipment business for over 15 years now and
specialises in supplying brake blocks and couplers to Indian Railways. Over the years, the
company has also expanded into other areas like suspension systems and friction/rubber
products. Furthermore, the company is working on developing air conditioning and traction
modules for railways. Over the past few years, the company has tied up with foreign
partners (for example, Czech Republic-based DAKO-CZ; Spain-based Ingeteam) to build
technical capabilities for new products. The company competes with a number of MNC
players and domestic manufacturers in the railways segment.
With 3 out of 7 Till 2012, there was limited investment on Railways as Escorts was not really focusing on
products launched; this business segment. However, post 2012, the company has started investing on new
order book has swelled products, which has helped it scale the business up. Escorts has been investing in seven
from Rs0.6 bn to Rs2.8 new products—three out of which have been commercialised (Axle mounted disc brake,
bn Boggie Mounted Disc Brake, Automatic doors for metros and railways). It is in advanced
testing stages for air springs and there are three more products that will come in in the
next few years. On the back of these efforts, the company is targeting to double its annual
revenues from Rs2.4 bn in FY17 to ~Rs5 bn by FY21 (~17% revenue CAGR).
The order backlog in the business remained largely steady over FY14-FY16. In past six
quarters, however, the company has been gaining traction. Order book has risen from a
level of ~Rs600 mn in FY16 to ~Rs2.8 bn now. Most of the orders generally tend to have
an order period of 6-7 months. However, in the current order book, there is an order of
Rs1 bn for couplers, which will be completed over a longer time period.
Figure 29: Railways segment order backlog up sharply over past couple of
years; spike in Oct-17 from a Rs1 bn order received for couplers
3,200 200%
2,800 175%
2,400 150%
2,000 125%
1,600 100%
1,200 75%
800 50%
400 25%
- 0%
Oct-17
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
3Q16
4Q16
1Q17
2Q17
3Q17
4Q17
1Q18
2Q18
Railways order book (Rs mn) % yoy (RHS)

30 November 2017
While the rise in order backlog is a positive development, the new orders require the
company to import part of the equipment, which in turn implies that EBIT margins on these
orders will be lower than other orders. We are building 100 bp lower margins for the
railways business on account of this change in revenue mix. However, as indigenisation of
these products happens over the next few years, we expect that EBIT margin of the
railways segment can rise to the 16-18% level.
Railways business has reasonable barriers to entry
The railways business is a tender-based business with tenders coming from Indian
Railways and the different wagon manufacturers. It takes time for a supplier to get
approvals from the Research Designs and Standards Organisation (RDSO) under the
Ministry of Railways. The competitive intensity in this business seems relatively benign,
which is visible from the healthy operating margins and RoCE that the business has
enjoyed over the past few years. Even though railways acquires equipment on L1 (lowest
bidder) basis, the challenge for potential entrants lies in getting certified by the railways to
bid for equipment.
Recently, Escorts also got certification for the design and manufacturing of braking
systems, couplers and other railway components by International Railway Industry
Standard (IRIS). As per management, this should enable it to offer quality products to
Indian Railways at a relatively competitive price vs the currently imported equipment.
Figure 30: Railways equipment product offerings

Product segment Offerings Competitors
Brakes Axle Mounted Disc Brake System for High Speed Trains, Electro - Pneumatic Brake System for EMU, Knorr Bremse, Fluid Controls, Kuzlitmash,
Pneumatic Brake Controller for Microprocessor Controlled EMU Coaches, Bogie Mounted Brake System JSC MTZ Transmash, Avadh Rail Infra,
for Wagons, Microprocessor Controlled Brake System For Loco, Air Brake Accessories, Slack Adjuster, Harting India
Brake Disc, Failure Indication and Brake Application
Couplers AAR-H Couplers for Passenger Coaches, AAR-H Coupler for Locomotive, AAR-H Coupler with Transition Harting India, AD Electrosteel
Screw Coupling, Semi Permanent Couplers, Automatic Couplers, Balanced Draft Gear for AAR-H Coupler,
Standard Draft Gear for AAR-H Coupler
Suspension systems Hydraulic Dampers, Air Spring Control Equipment, Failure Indication & Brake Application (FIBA) for LHB Knorr Bremse, Gabriel India, Avadh Rail
Alstom and EMU Coaches Infra
Friction and rubber Escorts Grade F01/KNAC & KNAE (CBB for Passenger Coach & EMU), Non Asbestos composite brake pad, Knorr Bremse, Star Track Fasteners
products Escorts Grade F03/LNAL (CBB for Diesel & Electric Locomotives), Escorts Grade F04/LNAF (CBB for Freight
Stock & Container Flat Wagons), Escorts Grade F05/KNAF (CBB for Freight Stock & Container Flat Wagons)
Figure 31: We build 15-18% growth p.a. in sales over Figure 32: Operating margins have improved
FY17-20E substantially since FY14 lows
4,000 50 600 25.0
3,500 40
500 20.0
3,000 30
2,500 20 400
15.0
2,000 10 300
1,500 0 10.0
200
1,000 -10
500 -20 100 5.0
- -30
- -
FY07
FY08
FY09
FY10
FY11
FY12
FY19E
FY14*
FY15
FY16
FY17
FY18E
FY20E
FY18E
FY19E
FY20E
FY14*
FY07
FY08
FY09
FY10
FY11
FY12
FY15
FY16
FY17
Railways equipment sales (Rs mn) % yoy growth (RHS) Railways equipment EBIT (Rs mn) EBIT margin (RHS)
* FY14 was 18 month period. FY07-FY12 are Sep ending. Source: Company, CS estimates * FY14 was 18 month period. FY07-FY12 are Sep ending. Source: Company, CS estimates

30 November 2017
Company looking to acquire capabilities via acquisitions

Escorts is looking to expand its area of business via the inorganic route. In addition to its
core area (couplers, brake systems), the company expects strong growth in mechatronics
and high-end propulsion systems over the next few years. Management intends to acquire
these capabilities via acquisitions, and tap the business opportunities that are likely to be
offered by railways, given their focus on network enhancement, rolling stock addition and
capex on safety. Acquisitions are also likely to help the company reach its target of Rs10
bn revenues over three to four years vs likely revenues of Rs2.8 bn in FY18E.
Construction equipment witnessing cyclical uptick

Escorts has presence in three sub-segments of the construction equipment business,
namely backhoe loaders, compactors, and pick and carry cranes. This equipment is used
in real estate construction and various segments of infrastructure including roads, power,
mining and airports. The industry is highly competitive with several MNCs and domestic
manufacturers competing for volumes. Given its dependence on real estate and
infrastructure, demand is cyclical and dependent on capex activity in the country.
The Indian government’s thrust on infrastructure spend (roads, railways, metro projects)
has helped demand growth over the past couple of years. Future outlook also looks
promising as the government has indicated large investment plans in roads (Bharatmala
program) and railways. Metro capex also continues in the country with new projects likely
to be taken up in Mumbai (line 5, 6), Delhi (Phase IV), Surat and other cities.
Figure 33: Industry has grown 16-30% over the past Figure 34: Backhoe loaders account for nearly half
two years of total volumes
80,000 50 Construction equip. FY17 indsutry volumes (~67,000 units)
70,000 40 Others
Compressors, 3%
60,000 30 Crushers
5%
50,000 20 Compactors
5%
40,000 10
Pick & carry
30,000 0
cranes
7%
20,000 -10
10,000 -20
- -30 Backhoe
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Loaders
Excavators and 46%
Construction equipment market (no.) % yoy (RHS) others
34%
We think volume growth for the company will likely mirror that of the industry. We are
sanguine about the industry’s growth prospects and believe that Escorts will also benefit
from pick-up in demand. The rise in volumes should help in the improvement of operating
performance, based on operating leverage. We are not very positive on the pricing power
in this industry as the competitive intensity remains high, and hence we do not expect any
significant rises in realisation.

30 November 2017
Figure 35: Escorts—key construction equipment products

Construction Market share Main products Competitors Remarks
equipment segment
Backhoe loader ~3% Jungli backhoe loader JCB, Terex, Escorts entered this business in
Caterpillar, Case 2010; Aiming for 8-10% market
share in few years
Pick and carry cranes ~45% Hydra series, TRX series, FX series ACE, Terex Very competitive segment and
hence thin margins. Margins
lowest in basic hydra series;
higher in other segments.
Compactors ~12% Soil vibratory rollers (EC-5250, EC- JCB, Atlas Copco, Pick-up in road development
2420), Tandem vibratory rollers SEM activity should drive demand
Figure 36: Escorts operates in three segments Figure 37: Construction equipment turning around
addressing ~60% of construction equip. industry with volume growth and cost rationalisation…
Escorts FY17 volumes (~3300 units) 10,000 10.0

9,000 8.0
8,000 6.0
Compactor 7,000
13% 4.0
6,000
2.0
5,000
-
4,000
(2.0)
3,000
2,000 (4.0)
Backhoe (6.0)
1,000
Loaders
27% Pick & Carry - (8.0)
cranes
FY14*
FY18E
FY19E
FY20E
FY07
FY08
FY09
FY10
FY11
FY12
FY15
FY16
FY17
60%
Construction equip. sales (Rs mn) EBIT margin (RHS)
FY14 (18M year) number adjusted to 12M. Source: Company, CS estimates Source: Company data, Credit Suisse estimates
Gross margin improvement project underway in CE too

After the success it has had on the tractors side, the company has engaged the same
consultant to help with gross margin improvement on the Construction Equipment side too.
It has merged its CE procurement team with its tractor team, which has prior experience in
this process, and hence is expecting to see results in the next two to three years itself. As
was the case with the tractors project, the task involves vendor rationalisation as well as
VA/VE projects. On the back of this and the fixed cost reduction programmes underway
across the company, it is hoping to achieve a double digit margin in its CE division as well
by FY20. We are building in a 6% EBIT margin in our numbers; hence, there could be
upside if the company achieves its target.

30 November 2017
Fastest EPS growth, lowest valuations

Escorts' earnings growth (FY17-20) of ~33% is the best amongst auto OEMs and it trades
at the lowest multiple among all stocks. Earnings growth will be driven by double digit
topline growth and steady ~100 bp margin expansion every year. With surplus capacities
across segments, it has limited capex needs and hence FCF generation will be very strong
and ROCEs should improve to healthy 20% levels by FY20. We see Escorts' story as
being similar to TVS, with expectations of both market share and margin catch-up to
industry levels. Whilst Escorts trades at 12.5x FY20E P/E, TVS trades at 30x. We value
Escorts at 18x (similar multiple to Mahindra and at a 10% discount to TVS, which has a
superior corporate governance perception). The key risks to our call are a sharp decline in
tractor volumes and a rise in competitive intensity (John Deere). Escorts has a third of its
stock as treasury stock created from the merger of the construction equipment business;
we adjust this in the number of shares to derive our target price of Rs900.
Escorts to see fastest FY17-20 earnings growth…

Given that tractors form ~80% of revenues, topline growth for the company will be driven
to a large extent by the segment. On tractor revenues, however, with GST implementation,
there is a one-time 6-7% downward revision on revenues. Despite that, we expect tractors
to deliver a 11% CAGR over FY17-20, driven by ~13% volume growth during the period.
Given the strong traction in railways and construction equipment, however, their topline
growth is going to be even better at ~16%; hence, increasing overall topline growth to
~12% CAGR.
However, we expect EBIT margins across segments to improve, with tractor margins
improving from 10.3% to 14%, railways from 13% to 15% and construction equipment
witnessing a sharp ~850 bp turnaround from -2.5% to 6.0%. With surplus capacities
across segments and hence low capex needs, FCF generation will remain strong. We
expect ROCE to double from 10% to 20% going forward.
Figure 38: Expect strong revenue and EBIT CAGR over FY17-20E
(Rs mn) FY15 FY16 FY17 FY18E FY19E FY20E FY17-20
CAGR
Tractors vols. (incl. exports) 59,779 51,455 63,786 73,433 82,989 90,567 12.4%
Construction equip. vols. 3,007 2,555 3,315 3,978 4,575 5,261 16.6%
Revenues
Agri machinery 32,066 27,206 33,452 36,817 41,399 45,632 10.9%
Construction equipment 5,131 4,797 5,944 6,919 8,037 9,335 16.2%
Railways 1,837 2,177 2,391 2,821 3,245 3,731 16.0%
Auto 1,040 965 498 - - -
Total 40,074 35,145 42,285 46,557 52,681 58,698 11.6%
EBIT
Agri machinery 2,293 2,236 3,446 4,528 5,589 6,388 22.8%
Construction equipment (248) (284) (138) 69 201 560 Nm
Railways 175 215 307 381 422 560 22.2%
Auto (237) (165) (103) - - -
Total 1,972 1,981 3,510 4,979 6,212 7,508 28.8%
EBIT margin (%)
Agri machinery 7.2 8.2 10.3 12.3 13.5 14.0
Construction equipment (4.8) (5.9) (2.3) 1.0 2.5 6.0
Railways 9.5 9.9 12.8 13.5 13.0 15.0
Auto (22.7) (17.1) (20.7)

30 November 2017
Figure 39: Healthy improvement in FCF and ROCE… Figure 40: …as capex needs are also very low
6,000 25.0 1,400
5,000 1,200
20.0
4,000 1,000
15.0
3,000 800
10.0
2,000 600
5.0 400
1,000
- - 200
-
(1,000) (5.0)
18MFY14
FY18E
FY19E
FY20E
FY09-Sep
FY10-Sep
FY11-Sep
FY12-Sep
FY15
FY16
FY17
FY18E
FY19E
FY20E
18MFY14
FY09-Sep
FY10-Sep
FY11-Sep
FY12-Sep
FY15
FY16
FY17
Capex (Rs mn)

FCF (Rs mn) RoCE (%, RHS)
… and trade at the lowest multiple in the sector

Stock thesis similar to TVS, which saw massive re-rating
To find the right valuation benchmark for Escorts, we look at other auto stocks in India to
find a good comparable. Whilst Mahindra has a large tractor business, tractors form only a
third of its value. Car companies like Maruti have a much lower penetration and hence
much longer growth horizon, so tractors should trade at a discount. We reckon two-
wheeler stocks represent the best comparable with penetration likely to peak for both by
FY25, incremental growth driven by rural, and a combination of low capex, R&D
requirements and healthy margins resulting in good ROCE. Within two-wheeler stocks, the
Escorts story is similar to TVS with a combination of steady market share gains and
margin improvement (margin catch-up to industry levels), driving strong EPS growth. We
value Escorts at the same multiple as Mahindra, a 10% discount to TVS. We value TVS at
20x but it trades at 30x, thus our multiple represents a ~40% discount to TVS's multiple.
Figure 42: …TVS with similar dynamics has seen a

Figure 41: Valuation for Escorts undemanding... massive rerating in past five years
40.0 40% 45.0
35.0 35% 40.0
30.0 30% 35.0
30.0
25.0 25%
25.0
20.0 20%
20.0
15.0 15%
15.0
10.0 10%
10.0
5.0 5%
5.0
- 0%
0.0
Bajaj Hero TVS Maruti M&M Eicher Escorts
Apr-05 Apr-07 Apr-09 Apr-11 Apr-13 Apr-15 Apr-17
FY19 PE (X) FY20 PE (X) FY17-20 EPS CAGR (RHS)
TVS P/E (12m forward) 10 year average
Source: Reuters, Credit Suisse estimates Source: Reuters, Credit Suisse estimates

30 November 2017
Merger of construction equipment business created treasury stock

Escorts' promoters' direct stake in the company was only 12.43% earlier and they held
another 19.33% through associate companies (Escottrac Finance and Escorts Finance) in
which Escorts held 49.81% directly and 99.64% indirectly. Escorts merged the associate
companies with itself, resulting in a very small dilution; however, instead of cancelling
shares, it created treasury shares. Similarly, when it also merged its 100%-owned
construction equipment business with itself instead of cancelling the shares, it created
treasury stock, resulting in a ~14% dilution for minority shareholders.
We believe one of the key reasons for management wanting to do the same is the low
Promoter holding in the company of 12.43%, without these treasury shares making it
susceptible to a hostile takeover bid by another tractor player. These shares also help
management in exercising voting rights of 41.13% compared to 12.43% that it would have
had had it chosen to cancel these shares. However, we note that the trustee for the trust
holding these treasury shares is an independent director, Dr Sutanu Behuria.
Also, management is now averse to taking a large debt, given the experience of the group in
the early 2000s where it had to shed a number of businesses to repay debt obligations. It
wants to monetise these shares for any future inorganic opportunities rather than take on
debt. Another negative of this structure, however, is that it loses Dividend Distribution Tax on
the dividend distributed to the company itself; the dividend though currently is a small amount.
However, since these shares are still owned by the company, the value resides within the
company itself, and hence while valuing the company, we chose to adjust these shares.
We do the same while valuing Mahindra & Mahindra (another tractor company and a
group generally seen as having a good Corporate Governance track record) where the
treasury stock got created when it acquired another tractor company, Punjab Tractors.
Initiate with OP, with TP of Rs900 representing a 30% upside
We initiate coverage on Escorts with a target price of Rs900, representing ~30% upside
from the current levels. Our target price is based on a P/E multiple of 18x Sep-19E EPS
(adjusted for the treasury shares). Stock currently trades at an EV/EBITDA multiple of 6.5x
(adjusted for treasury shares)—again one of the lowest in the industry.
Blue-sky scenario: In our blue-sky scenario, we assume that Escorts is able to deliver on
market share improvement higher than our current assumption of 50 bp market share
improvement over two years. In that scenario, Escorts could get a valuation multiple of 20x
(vs our base case multiple of 18x), resulting in our target price of Rs1,000.
Grey-sky scenario: For our grey-sky scenario, we assume that tractor volumes
disappoint on account of two consecutive bad monsoons, resulting in 10% lower-than-
expected earnings. We also assume a much lower multiple of 12x (vs our base case
multiple of 18x) in our grey-sky scenario in case any of the CG risks at Escorts materialise.
A 12x multiple with 10% lower earnings would result in a target price of Rs640.

30 November 2017
Figure 43: Valuation matrix of covered auto OEMs in India

Company CMP (Rs) Mkt. cap Rating# Target Upside/ FY19 PE FY20 PE EPS CAGR FY19E ROE FY19E FY20E FY18E
(US$ bn) price (Rs) Downside (%) (X) (X) (FY17-20E) (%) EV/EBITDA EV/EBITDA P/B (X)
Hero Motocorp 3,674 11.4 N 3,560 -3.1% 18.6 16.6 9.5% 30% 12.0 10.2 6.3
Bajaj Auto 3,293 14.8 N 2,830 -14.0% 20.8 18.9 7.2% 21% 15.2 13.1 4.8
TVS Motors 743 5.5 U 490 -34.1% 36.2 30.7 27.2% 26% 23.1 19.5 12.0
Eicher Motors 30,512 12.9 U 26,600 -12.8% 29.1 25.0 25.8% 31% 20.7 17.3 11.5
Maruti 8,626 40.5 N 7,300 -15.4% 25.7 22.1 17.1% 21% 16.0 13.3 6.2
M&M 1,435 13.8 O 1,800 25.4% 19.0 17.7 13.5% 14% 12.0 11.1 3.1
Tata Motors 416 18.6 O 560 34.6% 7.6 6.1 46.0% 22% 3.1 2.6 2.1
Ashok Leyland 122 5.5 U 98 -19.3% 23.0 19.6 13.1% 20% 12.9 10.7 5.1
Escorts 688 1.3 O 900 30.8% 15.4 12.5 33.4% 15% 13.8 11.4 2.6
# Rating: O – Outperform. N – Neutral. U – Underperform. Source: Company data, Credit Suisse estimates
Key risks
Key corporate governance issues in the past
Treasury stock created by the merger of subsidiary and associates
The main corporate governance concerns stem from the creation of the treasury stock post
the merger of its construction equipment business and associate investment companies
(discussed above). This resulted in an increase in voting rights for the promoters and a
dilution for minority shareholders; cancelling shares would have been ideal, in our view.
Royalty to promoters for the use of brand
The company pays a royalty of 0.5% to a promoter group company "Harparshad & Co.
Private Limited". The amount was Rs206 mn in FY17 and Rs173 mn in FY16. This is
similar to what the Tata Group companies pay to Tata Sons for the usage of the 'Tata'
brand but the 'Tata' brand has a very strong salience in the Indian market. In the case of
Escorts, we see little justification for this. However, this transaction is a part of the
numbers, and hence is already reflected. The key risk here would be if the royalty
percentage is increased, but we believe this is unlikely.
Escorts has taken some steps to address corporate governance issues
Escorts has taken a number of steps over the past few years to address corporate
governance issues. It has moved its internal audit to Grant Thornton. It has strengthened
its Board of Directors in the past few years. It has also improved capital allocation by
disposing of the unprofitable auto components business. It has increased transparency by
disclosing its monthly volume numbers like other auto companies.
Business risks
Weak tractor demand over a sustained period
The tractor industry is cyclical and witnesses weakness in demand growth once every
three to four years. This weakness is pronounced in years when monsoons are weak for
two years in a row. If monsoons were to be weaker than normal in FY19E and FY20E,
there will be risk to our demand growth estimates, especially in FY20E. Government does
come out with support schemes in such cases, and those should help offset some of the
negative impact of weak monsoons.
Competitive dynamics in the tractor industry
The current structure of the industry is such that it has a few large players (post the
consolidation seven to eight years ago), who are focused on profitability. Hence, operating
margins for the companies in the sector have remained largely steady, even during weak
demand years of FY15 and FY16. However, if some of the players become aggressive
either to gain market share (smaller ones) or to defend market share (some of the larger
ones who are losing out), there could be pricing pressure in the industry. If this scenario
were to play out, it could lead to pressure on earnings.

30 November 2017
Construction equipment: Lower-than-expected capex activity

The construction equipment industry has seen healthy growth in demand over the past two
years, supported by a pick-up in infra spend. This was driven largely by the public sector
spend, while the private sector capex remains muted. If this capex spend from the
government were to slow down, it could impact demand for construction equipment. As of
now, the government intent seems very strong on infrastructure development in the
country—be it roads, railways, mining, power transmission or metro projects. In addition to
providing funds, the government has also worked towards addressing the usual issues,
namely, land acquisition and clearances, which had impacted projects’ progress in past.
We believe the risk of a slowdown in infra capex is relatively low currently, and hence do
not see this as a major risk.
Railways equipment: Lower capex and higher competitive intensity
Railways, like other government projects, is a tender-based business. Slowdown in
railways capex can lead to higher competitive intensity as the supplier pool remains largely
constant. On the positive side, new entrants find it difficult to enter the segment, given the
long process of certification, which thus creates an entry barrier for new companies. On
the capex part, the government has been budgeting for over Rs1 tn p.a. capex over the
past three years. With recent safety-related incidents, the focus on railways spend should
only increase, thus addressing the risk of any slowdown.
Credit Suisse HOLT® View

(Please note that Credit Suisse HOLT is not a part of Equity research)
The HOLT methodology uses a proprietary performance measure known as Cash Flow
Return on Investment (CFROI®). This is an approximation of the economic return, or an
estimate of the average real internal rate of return. A firm's CFROI can be directly
compared against its real cost of capital (the investors' real discount rate) to see if the firm
is creating economic wealth. By removing accounting and inflation distortions the CFROI
allows for global comparability across sectors, regions and time and is a more
comprehensive metric than the traditional ROIC and ROE.
HOLT® on Escorts Limited
CFROI for Escorts Limited has been largely uninspiring as the company endured a tough
period where its diversification into Telecom and IT failed and also faced the rise in
competitive intensity in its core business. The company then embarked on a turnaround
plan in 2011, shedding its non-core and loss making businesses (auto-components,
hospitals, telecom, etc.) and invested in new products. Highlighted in Figure 44, the
turnaround efforts seemed to have borne fruit, as FY16 CFROI saw a ~100bp
improvement. The recovery is underpinned by higher margins as well as a recovery in
topline growth and asset turns. This translated into incremental improvements in economic
profits (a monetary estimate of wealth creation). In addition, the company’s leverage and
cash flow positions improved markedly as well.
Near term IBES consensus estimates suggest the turnaround would continue with high
teens topline growth and continued margins expansion. But with the stock up over 100%
over the past year, it is helpful to see if the turnaround is already priced in. Incorporating
IBES consensus estimates above, current share price implies no further margins
improvement beyond FY3/19 and topline growth to slow to 6% over the same period.
Expectations do not appear demanding against CS analyst’s expectations of a second
phase of turnaround where Escorts Ltd could potentially regain market share with new
product launches and channel expansion.

30 November 2017
Figure 44: Escorts Ltd shedding assets and showing incremental improvements in economic profits;
deleveraged balance sheet and improving its cash flow position
CFROI Econom ic Profit
Asset Growth Change in Econom ic Profit
Incremental improvements
in economic profits
Shedding
(unprofitable) assets
Leverage (x) HOLT Fixed Charge Ratio
Deleveraging the Improving CF

balance sheet position
Source: Credit Suisse HOLT LensTM.

30 November 2017
Figure 45: Market implied scenario for Escorts Ltd—Priced for no further margins improvement and topline
growth slowing to 6% over FY3/20-22
IBES Consensus
Est.
6%
Note: Normalized DR to 3Y average
10.7%
Source: Credit Suisse HOLT LensTM.

30 November 2017
Appendix I: History and Promoter group

Escorts was set up in 1948 by Mr Yudi Nanda and Mr HP Nanda as an agri machinery
company. Over the years, the company collaborated with foreign companies and set up its
manufacturing facility for tractors. In addition to tractors, the company also diversified into
various business segments, including construction equipment, railways equipment and
auto components (divested). The Escorts group also entered the telecoms business in the
late 90s and later sold off the business. Escorts is currently led by Mr Nikhil Nanda,
Managing Director, along with various business heads who manage the three business
verticals—Agri Machinery, Construction Equipment and Railways Equipment.
Mr Rajan Nanda, Chairman
Mr Nanda is a second-generation entrepreneur with over four decades of experience in
the engineering and manufacturing sector. He took over as the Chairman of Escorts group
in the 1994 and managed the group’s various businesses across companies, including
tractors, construction equipment, railways equipment, NBFC, telecom and healthcare.
Mr Nikhil Nanda, Managing Director
Mr Nanda is a third-generation entrepreneur and the driving force behind the company’s
diversified business portfolio. He has been working with the company for over 15 years
and was promoted to Managing Director in September 2013. In the past five years, Mr
Nanda has focused on improving the competitiveness of the company through various
measures, including cost rationalisation and divestment of sub-scale business segments.
Mr Nanda is an alumnus of Wharton Business School, Philadelphia, with majors in
Management and Marketing.
Shenu Agarwal – Domestic Agri Machinery
Mr Agarwal has over 25 years of professional experience in various fields, including sales
and marketing, R&D, product management and strategic planning, including international
stints (USA). He is currently managing the domestic agri machinery business. He has a
degree in mechanical engineering and an MBA from Duke University.
Ravi A. Menon – International Agri Machinery and new initiatives
Mr Menon is an experienced professional who brings many years of leadership in
corporate strategy, marketing, sales, branding, international markets and production. Prior
to joining Escorts, he held senior leadership roles across John Deere, ACC Limited, Exide
Industries Limited. He holds a Master’s degree in Management.
Ajay Mandahr – Construction Equipment
Mr Mandahr has over 25 years of rich experience in leadership positions, including sales
and marketing, developing new product categories and developing new business model, in
companies like L&T, Indian Aluminium and Manitou South Asia Ltd. His last assignment
was with Toyota Material Handling as Director – Operations. Mr Mandahr is a Mechanical
Engineer and holds an MBA in Marketing.
Dipankar Ghosh – Railways Equipment
Mr Ghosh has 23 years of rich experience in full lifecycle product development,
manufacturing operations, engineering management, business development, and
technology transfer from many Railway OEMs to India. He is an ex-Indian Railway Service
officer and was the Vice President with John Deere India in his last assignment. Mr Ghosh
is a post graduate in Engineering from BITS Pilani, and has done his management studies
from Indian School of Business, Hyderabad, besides an Advanced Global Leadership
degree from London School of Economics as a British Chevening Scholar.

30 November 2017
Board of Directors
The company has also worked towards inducting people with strong professional background
as its directors, who can provide strategic inputs based on their area of expertise.
Figure 46: Board has representation from professionals across various fields
Name Category Past experience
Mr. P.H. Ravikumar Non Executive and Independent Director ICICI Bank, Bank of India, NCDEX
Mrs. Vibha Paul Rishi Non Executive and Independent Director Titan, Max India, Pepsico, Future Group
Dr. Sutanu Behuria Non Executive and Independent Director IAS officer served as Secretary in Dept of Fertilizers, Ministry of
Minority Affairs and Dept of Heavy Industry
Mr.D.J. Kakalia Non Executive and Independent Director Lawyer and Partner of Mulla & Mulla & Craige
Mr. Hardeep Singh Non Executive and Non Independent Cargill South Asia, Amalgamated Plantations (Tata Group),
Director Chairman of Monitoring committee on Minimum Support Price
Mr. G.B. Mathur Non Executive and Non Independent Strategic Advisor and Company Secy of Escorts earlier
Director
Source: Company data, Credit Suisse research
Figure 47: Shareholding pattern

Holders % holding
Promoters 42.98
Mutual Funds 5.49
Foreign investors 15.30
Financial institutions & banks 0.30
Individuals 35.93
Shareholders holding > 1%
Rakesh Jhunjhunwala 9.16
UTI 2.71
T Rowe Price 2.43
Goldman Sachs 2.30
HSBC Global Fund 1.35
Source: Bombay Stock Exchange

30 November 2017
Companies Mentioned (Price as of 28-Nov-2017)

Bajaj Auto Limited (BAJA.BO, Rs3292.6)
Eicher Motors (EICH.BO, Rs30512.05)
Escorts Ltd (ESCO.BO, Rs688.3, OUTPERFORM[V], TP Rs900.0)
Hero Motocorp Ltd (HROM.BO, Rs3673.85)
Mahindra & Mahindra (MAHM.BO, Rs1435.05)
Maruti Suzuki India Ltd (MRTI.BO, Rs8626.2)
TVS Motors (TVSM.BO, Rs743.1)
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Target Price and Rating

Valuation Methodology and Risks: (12 months) for Escorts Ltd (ESCO.BO)
Method: Our TP of Rs900 for Escorts Ltd is based on 18x Sep-19E EPS (earnings per share; adjusted for treasury shares). This multiple is similar
to that used for Mahindra and at a 10% discount to TVS, which has a superior corporate governance perception. We rate the stock
OUTPERFORM as the company is well placed to benefit from volume growth in tractor industry as well as pick up in construction
equipment demand.
Risk: Risks that could impede achievement of our target price of Rs900 and OUTPERFORM rating for Escorts Ltd include: lower-than-expected
growth in tractor demand for the industry and Escorts, which can impact our earnings estimates and target price; a slowdown in tractor
volumes; increase in competitive intensity on tractors; and a slowdown in infrastructure spending by the government.
Please refer to the firm's disclosure website at https://rave.credit-suisse.com/disclosures/view/selectArchive for the definitions of abbreviations
typically used in the target price method and risk sections.
See the Companies Mentioned section for full company names
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banking, securities-related: MAHM.BO, HROM.BO
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Credit Suisse Securities (India) Private Limited ........................................................................................................... Jatin Chawla ; Vaibhav Jain
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Credit Suisse Securities (India) Private Limited ........................................................................................................... Jatin Chawla ; Vaibhav Jain

30 November 2017
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30 November 2017
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30 November 2017

Escorts Ltd (ESCO.BO)

Focus charts and tables

Escorts Ltd (ESCO.BO) 2

Multiple cylinders firing

Escorts Ltd (ESCO.BO) 3

Escorts Ltd (ESCO.BO / )

Escorts Ltd (ESCO.BO) 4

Margin focus drove turnaround

Figure 7: Brief history of Escorts till date

Source: Company data

Group has shed unprofitable ventures

Escorts Ltd (ESCO.BO) 5

Source: Company data, Credit Suisse estimates

Sold its loss making auto component business last year

Auto segment revenues (Rs mn) EBIT margin (RHS)

Source: Company data, Credit Suisse estimates

Escorts Ltd (ESCO.BO) 6

Investments in products have helped stem share

Source: Company data, Credit Suisse estimates

Escorts - domestic tractor volumes Market share(RHS)

Source: Company data, Credit Suisse estimates

Escorts Ltd (ESCO.BO) 7

Strong margin improvement in tractors

RM cost (Rs mn) RM cost as % of sales (RHS)

Source: Company data, Credit Suisse estimates

Escorts Ltd (ESCO.BO) 8

High share of high cost permanent workers distorts cost structure

Escorts Ltd (ESCO.BO) 9

Favourable cycle, market share focus to

Tractor cycle will remain supportive

Escorts Ltd (ESCO.BO) 10

Figure 17: Successive failures of monsoons can impact demand

Source: Company data, Indian Met Department, Credit Suisse estimates

Figure 18: Reservoir levels improved in FY17 as compared to FY16

Live storage in TM CUM YoY change (%, RHS)

CUM – Cubic. M. Source: CMIE, Credit Suisse estimates

Escorts Ltd (ESCO.BO) 11

Opportunity to gain market share exists

Figure 19: Tractor industry has got consolidated by M&A activity

20% 41% 43%

Mahindra TAFE International tractors Escorts John Deere Others

Source: Company data, Credit Suisse estimates

Figure 20: Brief profile of the key tractor manufacturers in India

Escorts Ltd (ESCO.BO) 12

International Tractors Mahindra tractors segment

Source: Company data, Credit Suisse estimates

Escorts lost market share till FY15; gained 50 bp in FY17

Region wise market composition Region wise Escorts' volumes

Escorts Ltd (ESCO.BO) 13

Upto 30hp 31-40 hp 41-50 hp >51 hp North South East West

Source: Company data, Credit Suisse estimates

New product launches now plugging in whitespaces

Escorts Ltd (ESCO.BO) 14

Focused distribution in weak markets; other brand in strong markets

Escorts Ltd (ESCO.BO) 15

Large exports opportunity provides room to scale up

Tractor exports of Escorts India exports As % of total

Source: Company data, Tractor Manufacturers Association, Credit Suisse estimates

Escorts Ltd (ESCO.BO) 16

Railways a growth engine; CE cycle positive

New product investments benefit in Railways also

Railways order book (Rs mn) % yoy (RHS)

Source: Company data, Credit Suisse estimates