On Friday, Incred Research adjusted its outlook on Escorts Kubota Ltd (ESCORTS:IN) shares, raising the price target to INR3,064 from INR2,385, while continuing to recommend a Reduce rating on the stock. The revision comes amid a notable rise in the company's stock price, driven by a rebound in tractor demand.
Despite the increased target, the firm's analysis suggests that current valuations, including forward price-to-earnings (P/E) and price-to-book value (P/BV) ratios, are above the plus two standard deviations of the five-year mean.
The research firm acknowledges the positive impact of above-normal monsoons on the company's valuation but cautions that the recovery in demand is expected to be gradual and more pronounced towards the end of the period.
The analyst's comments reflect a concern that the market has already priced in the benefits of favorable weather conditions. Moreover, the report indicates that the high valuation does not fully account for the anticipated delays in realizing the synergistic benefits from Kubota on exports.
The maintained Reduce rating is supported by a new price target of INR3,064, which is based on a forward-looking valuation of 25 times the company's one-year forward P/E. The updated price target represents a roll-forward valuation method, which takes into account expected future earnings.
The analyst also points out that government policies related to agriculture and railways could pose an upside risk to their assessment. These factors are critical to the company's performance and could influence the stock's future trajectory.
Escorts Kubota's financial performance and stock valuation will likely continue to be influenced by these external factors and the company's ability to capitalize on potential synergies with Kubota.
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