Experts put 'Sell' call on Escorts, shares plunge - Rakesh Jhunjhunwala set to suffer setback from this favorite stock

There is a stock that is facing severe heat from investors. That share is Escorts, whose share price plunged by more than 3%, touching an intraday low of Rs 791.80 per piece. Thereby, the company has given away the over Rs 800-mark, and is trading at Rs 795.05 per piece, down by Rs 21.75 or 2.66%. With this, one investor has definitely seen a massive plunge in value of his holding. This would be none other than big bull Rakesh Jhunjhunwala who holds a hefty Escort stake. In fact, In value terms, Escorts is second largest in Rakesh Jhunjhunwala's massive portfolio after Titan Company. Negative impact in Escorts is due to analysts giving a 'Sell' rating on the stock.  

Significantly, Escorts has delivered a strong performance over the last 3 years with ~23% CAGR in its tractor sales over FY15-FY19E on the back of up-cycle in tractor segment. Moreover, favourable geographic-mix coupled with its strategic initiatives helped Escorts gain market share in FY19. 

However, Mitul Shah, analyst at Reliance Securities, said, “Following a spectacular performance, the tractor industry is expected to take a pause in FY20E and would undergo cyclical downturn in FY21E. Further, extended winter in 2019 may lead to delayed monsoon this time, which may have negative impact on the agrarian output in FY20E and resultantly would impact the tractor volume across regions in FY20E.”

Shah added, “We expect ESC’s tractor volume to grow by 5% YoY in FY20E and fall by 7% YoY in FY21E. Therefore, we reduce our tractor volume estimates by 1% and construction equipment volume by 3% each for FY20E and FY21E. We lower our revenue and EBIDTA estimates by 2%/3% and 4%/6% for FY20E/ FY21E, respectively. Accordingly, we cut our EPS estimates by 4%/6% for FY20E/FY21E.”

Valuing the stock price  at 13x FY21E EPS, Shah said, “ we downwardly revise our Target Price to Rs760 from Rs875 earlier. In view of expected down-cycle for tractor industry, likely slowdown in construction equipment segment, margin pressure and recent price run-up, we downgrade our recommendation on ESC to REDUCE from BUY owing to unfavourable risk reward at current valuation.”

Coming back to Jhunjhunwala, he holds about 8.16% stake in Escorts with 10,000,000 equity shares that were worth Rs 816 crore.