Stocks to buy: Escorts, M&M among top picks in tractor market, industry growth expected to be slow
Nuvama Institutional Equities, reiterated its 'buy' rating on Mahindra & Mahindra (M&M) and stated that Escorts continues to be its top picks. After recently speaking with a zonal head of a tractor company, TAFE, Nuvama wrote in its report stated that the tractor market would remain flat during the festive period, that the volume of tractors would likely remain flat or even decline in FY24E due to a high base and a deficit monsoon, that M&M would gain market share due to the improved acceptance of the Swaraj brand, and that Escorts would gain from Kubota's assistance in the development of new products and improved quality.
As a result of Global Kubota's involvement as a promoter, Nuvama contends that Escorts should be evaluated on the basis of its promising medium-term potential. The support of Global Kubota, according to Nuvama, is anticipated through a combination of the Kubota trade company with Escorts, the opening up of new export opportunities, and technological assistance for product development.
"In all, we reckon a revenue compound annual growth rate (CAGR) of 23%/20% over FY23–26E/FY23–28E; we build in an EPS CAGR of 43%/33%. We reaffirm ‘BUY’ with a Sep-24E TP of INR4,000 at 30x P/E—justified, in our view, given robust growth prospects and the changeover to MNC ownership," said the brokerage.
Regarding M&M, brokerage Nuvama anticipates strong growth momentum with a revenue CAGR of 11% over the period of FY23-26E, driven by strong growth in the auto category and moderate growth in the agricultural segment. Additionally, improved net pricing in the auto sector would increase profitability and support a 16% CAGR in core earnings between FY23 and FY26E.
“This would sustain post-tax RoIC at 30%-plus. Maintain ‘BUY’
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