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TRACTORS INDIA LTD (TIL)
PRICE: RS.694
RECOMMENDATION: BUY
TARGET PRICE: RS.900
FY12E P/E: 8.8X
q TIL has been observing robust demand across all the business verticals.
MHS division is likely to record meaningful growth in the current year.
q Company's capex has been on track. Company has committed a capex of
Rs 1.5 bn for a Greenfield project at Khadagpur to increase capacity in
the MHS division.
q From seasonal perspective, we highlight that company posts major part
of its earnings in the second half of the financial year. We expect company would deliver 20% YoY growth in revenue at Rs.12726 mn with
PAT at Rs 677 mn for FY11E
q We maintain 'BUY' rating on the company's stock with a one year price
target of Rs.900 in lieu of significant upside on account of attractive valuations.
Management conference call Highlights
We recently interacted with the company to get perspective on the overall business
environment unfolding mainly in the domestic markets. Below are the key highlights
of our interaction.
n Company is observing meaningful demand across all divisions. However MHS
division is likely to record significant demand driven by up tick in demand in ports
and power space.
n Demand from mining and road sector has been sluggish. Management expects
that demand from these areas should start improving by Q4FY11.
n Managements expect to maintain its leadership position with over 50% market
share in the higher tonnage cranes (beyond 30 tonnes). However in other segments, company is anticipating stiff competition.
n TIL plans to manufacture Rubber Tyred Gantry Cranes in the crane division along
with screens and crushers of 170 TPH. Company is likely to maintain market
share in reach stacker.
n Management expects to maintain margins in the MHS division at current levels
of 20-22%. However with the introduction of new products, margins would appear to be lower for a short term.
n Management is anticipating stiff competition in the new product categories as
well. However, strong dealer and customer franchise is likely to provide the competitive edge to the company.
n Company has been witnessing meaningful demand from overseas geographies
like Myanmar and Nepal. However on sequential basis, international business
growth is likely to appear muted on account of some larger orders recorder from
Myanmar for engines in 1HYFY11.
n Company has recorded significant increase in working capital in the first half of
the current fiscal. This is mainly due to the fact that Caterpillar dispatches goods
on managed distribution basis. Therefore company has to get enough inventories
in place to suffice the sales plan for next few months.
n Company expects that these inventories would get liquidated in the second half
of the current fiscal.
n Company has committed for the Capex of Rs 1.7-1.8 bn. A part of it has already
been made on land and other assets. This also includes the royalty on imported
machinery that can be paid within six months of purchase. The cash outflow is
likely to be at Rs 700-800 mn in the current fiscal.
n Management has stated that the sales mix of the company is likely to get altered from currently 80% of Caterpillar business and 20% of MHS business to
50% of Caterpillar and 50% of MHS business in next 4-5 years.
Business Outlook
Domestic market is expected to remain buoyant between FY11-12E; driven by pick
up in demand for infrastructure equipment
n We expect Indian Infrastructure Equipment Industry (IE) to grow at a 25% CAGR
between FY10-12 on account of targeted investment of $500 bn on various infrastructure projects under eleventh five year plan in India.
n Company is well poised to grow at a consolidated CAGR of 20% over FY10-12E
in all the three business verticals viz. MHS, PSS and CMS. We believe that going
ahead, company would immensely benefit from favourable macros, dominant
brand perception of Caterpillar products.
n In FY10, company recorded 43% growth in rental income by surpassing fleet of
over 200 units. Going forward, company aims to ramp up its equipment rental
business, making it an integral part of operations given its nascent yet promising
growth opportunity.
n Further, we believe that the company would increase focus on regional markets,
industry segments and customers through the newly formed Territorial
dealerships under Tractors India Private Limited (TIPL), increasing market coverage, supported by opening new branches across India.
n We also believe that increasing construction and oil exploration activity along
with significant gas-based captive power capacity getting commenced in northern India offers visibility for the growth of PSS segment.
n Company's investment in MHS plant at Khadagpur is in progress and is expected
to get completed by FY12. Management expects to generate revenues to the
tune of Rs 2 bn in its first full year of completion.
Valuation and Recommendation
n On Consolidated basis, operating margins for the 1HYFY11 stood at 8%. Typically second half is better than the first half for the company. Therefore we have
build 11% EBITDA margins for FY11E in our forecasts.
n We expect that the company will maintain ROE% and ROCE% at current levels
of 23% and 18% respectively in FY11E.
n At current price of Rs.694, company's stock is trading at 10.3x and 8.8x P/E and
5.4x and 4.6x EV/EBITDA for FY11E and FY12E respectively.
n We recommend BUY on company's stock with a one year DCF based price target of Rs.900
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