Mumbai: Analysts have advised investors against tendering their entire ownership in the open offer at as they believe Kubota’s takeover will substantially improve Escorts’ medium-term growth outlook, potentially triggering a sharp re-rating in the stock.
After completion of this transaction, Kubota Agricultural Machinery India and Escorts Kubota India will be merged with Escorts, and this should increase the company’s volume, market share, manufacturing capacities, and distribution reach, said analysts. “Taking robust growth prospects into account, we do not recommend significant tendering of shares in the open offer,” said Raghunandhan NL, analyst at Emkay Global, while recommending buying the stock with a target price of Rs 2,140. “There could be upside to our fair value from the usage of large cash reserves for buybacks or dividends.”
Shares of Escorts, which rallied 51% in the last three months, ended flat at Rs 1,803.35 on Monday.
Last week, Escorts’ board announced Japan’s Kubota would acquire a 6.4% stake in the company at Rs 2,000 per share, taking Kubota’s stake to 16.4% after extinguishing the first round of treasury shares. This will trigger an open offer by Kubota for a 26% stake in Escorts at Rs 2,000 per share. Assuming the successful open offer and cancellation of all treasury shares, Kubota’s stake in Escorts will rise to 53.5%. The preferential allotment would infuse an equity capital of Rs 1,872 crore in the company.
Indian takeover laws require an acquirer to mandatorily make an open offer for an additional 26% stake in a target company once the original ownership in the entity crosses a 25% common stock threshold or acquirer exercise management control over the target company. The deal will be a win-win scenario for both companies, said analysts.
“We believe that the proposed transaction is beneficial for both the entities – Escorts and Kubota Corporation – as their respective strengths will complement each other in forging a leading global farm machinery player,” said Piyush Parag, analyst, Sharekhan. “The entities’ focus on establishing an R&D and Innovation Centre in India will be an attractive proposition, where both companies would jointly develop new products using existing and newer alternative technologies.”
After the first acquisition of a stake in Escorts by Kubota in March last year, the stock got substantially re-rated from a PE of 11.5 times to 20 times currently. The share price of Escorts has more than doubled since March last year, vastly outperforming the 80% gains in the broader markets.
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