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TRACTORS INDIA LTD (TIL)
RECOMMENDATION: BUY
TARGET PRICE: RS.850
FY12E P/E: 6.9X
q TIL has been observing sluggish demand for road equipment. However
demand is picking up in other segments like ports.
q Our interaction with the industry majors' viz. IRB, IVRCL has highlighted
positive outlook for the road construction activity in India. Recently NHAI
has also expedited its process of allotment of new road contracts.
q Company's capex has been slightly delayed. Company has spent partly
for the committed capex of Rs 1.5 bn for a Greenfield project at
Khadagpur to increase capacity in the MHS division.
q Management has been exploring various options to raise funds for the
funding of the Capex. It has also taken approval from the shareholders to
raise equity through the QIP route.
q Company is well positioned to benefit from increasing spending on infrastructure
in India. We maintain 'BUY' rating on the company's stock
with a one year price target of Rs 850 in view of significant upside from
current levels.
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 The company is observing meaningful demand for Cranes. Fork lifts and Stackers
in the material handling group. MHS division has recorded significant offtake
driven by up tick in demand in ports and power space.
n Demand from mining and road sector has been below expectation through FY11.
However, our interaction with various players in road construction space suggests
that there will be meaningful increase in the fresh order awarding from NHAI.
n In FY11 NHAI awarded approximately 5000 Kms of new road orders vis-à-vis
3300 kms in FY10. Major portion of which came in the later part of FY11. NHAI
has recently said that it shall be awarding close to 7000 kms in FY12.
n We believe that this augers well for TIL and Gujarat Apollo. Orders should flow to
these companies from players like IRB etc after the achievement of financial closure
of various road projects.
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 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 aims to ramp up its equipment rental business, making it an integral
part of operations given its nascent yet promising growth opportunity in the country.
In FY10 company has reported 43% growth in this segment.
n Management also intends to increase focus on regional markets, industry segments
and customers through the newly formed Territorial dealerships under
Tractors India Private Limited (TIPL). Company aims to increase its market coverage,
supported by opening new branches across India.
Capex at Khadagpur slightly delayed; management expects to
start production in Q2FY12E
n Company has committed for the Capex of Rs 1.7-1.8 bn mainly in the MHS division.
A part of it has already been made on land and other assets.
n 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 FY12E.
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.
Company has been exploring various routes of Capex funding;
shareholder's approval for raising equity through private placement
in place
n Management has been evaluating various options available for funding the
capex requirement. Company has taken the approval from the shareholders for
raising equity up to maximum of Rs 2.5 bn through QIP route.
n Company long term debt stands at Rs 220 mn. Company's current D/E stands at
0.4 (long term Debt/Equity at 0.08) and we believe that it is well positioned to
raise further debt to fund Capex.
n Company has recorded significant increase in working capital at Rs 2.6 bn in
1HYFY11. 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 to liquidate a part of these inventories in the second half of
FY12, proceeds of which is likely to get utilized for funding Capex.
Business Outlook: Domestic market is expected to remain buoyant
in 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.
n We believe that the improvement in the government spending is likely to benefit
the company and the peer group (TIL, Gujarat Apollo and Greaves cotton) in the
long run.
Valuation and recommendation
n At current price of Rs.539, company's stock is trading at 6.9x and 4.1x P/E and
EV/EBITDA on FY12E earnings respectively.
n We value the company using DCF valuation methodology and derive a price target
of Rs.850 per share.
n We maintain our BUY rating on company's stock.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
TRACTORS INDIA LTD (TIL)
RECOMMENDATION: BUY
TARGET PRICE: RS.850
FY12E P/E: 6.9X
q TIL has been observing sluggish demand for road equipment. However
demand is picking up in other segments like ports.
q Our interaction with the industry majors' viz. IRB, IVRCL has highlighted
positive outlook for the road construction activity in India. Recently NHAI
has also expedited its process of allotment of new road contracts.
q Company's capex has been slightly delayed. Company has spent partly
for the committed capex of Rs 1.5 bn for a Greenfield project at
Khadagpur to increase capacity in the MHS division.
q Management has been exploring various options to raise funds for the
funding of the Capex. It has also taken approval from the shareholders to
raise equity through the QIP route.
q Company is well positioned to benefit from increasing spending on infrastructure
in India. We maintain 'BUY' rating on the company's stock
with a one year price target of Rs 850 in view of significant upside from
current levels.
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 The company is observing meaningful demand for Cranes. Fork lifts and Stackers
in the material handling group. MHS division has recorded significant offtake
driven by up tick in demand in ports and power space.
n Demand from mining and road sector has been below expectation through FY11.
However, our interaction with various players in road construction space suggests
that there will be meaningful increase in the fresh order awarding from NHAI.
n In FY11 NHAI awarded approximately 5000 Kms of new road orders vis-à-vis
3300 kms in FY10. Major portion of which came in the later part of FY11. NHAI
has recently said that it shall be awarding close to 7000 kms in FY12.
n We believe that this augers well for TIL and Gujarat Apollo. Orders should flow to
these companies from players like IRB etc after the achievement of financial closure
of various road projects.
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 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 aims to ramp up its equipment rental business, making it an integral
part of operations given its nascent yet promising growth opportunity in the country.
In FY10 company has reported 43% growth in this segment.
n Management also intends to increase focus on regional markets, industry segments
and customers through the newly formed Territorial dealerships under
Tractors India Private Limited (TIPL). Company aims to increase its market coverage,
supported by opening new branches across India.
Capex at Khadagpur slightly delayed; management expects to
start production in Q2FY12E
n Company has committed for the Capex of Rs 1.7-1.8 bn mainly in the MHS division.
A part of it has already been made on land and other assets.
n 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 FY12E.
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.
Company has been exploring various routes of Capex funding;
shareholder's approval for raising equity through private placement
in place
n Management has been evaluating various options available for funding the
capex requirement. Company has taken the approval from the shareholders for
raising equity up to maximum of Rs 2.5 bn through QIP route.
n Company long term debt stands at Rs 220 mn. Company's current D/E stands at
0.4 (long term Debt/Equity at 0.08) and we believe that it is well positioned to
raise further debt to fund Capex.
n Company has recorded significant increase in working capital at Rs 2.6 bn in
1HYFY11. 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 to liquidate a part of these inventories in the second half of
FY12, proceeds of which is likely to get utilized for funding Capex.
Business Outlook: Domestic market is expected to remain buoyant
in 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.
n We believe that the improvement in the government spending is likely to benefit
the company and the peer group (TIL, Gujarat Apollo and Greaves cotton) in the
long run.
Valuation and recommendation
n At current price of Rs.539, company's stock is trading at 6.9x and 4.1x P/E and
EV/EBITDA on FY12E earnings respectively.
n We value the company using DCF valuation methodology and derive a price target
of Rs.850 per share.
n We maintain our BUY rating on company's stock.
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