VST Tillers Tractors - "Powering Ahead" ::LKP

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Capacity expansion to lift volumes in FY 13

VSTT is shifting their Bangalore tractor plant to the recently bought land at Hosur, the construction of which is expected to complete by May-June 2012. VSTT will more than double its tractor capacity from current 5,000 to 12,000 (in single shift) for a capex of Rs. 1bn, while the current plant in Bangalore will be entirely available for power tillers. Thus the company has a leeway to expand their tiller capacity depending on the demand. Post completion of the new tractor facility, the VSTT will have capacity to produce 24,000 18.5 hp tractors and 36,000 power tillers (both on a two shift basis). We thus expect revenues to grow at a CAGR of 23% during FY11-FY13E due to this initiative.

Government initiatives to emphasize farm mechanization to support power tiller growth

Government’s annual agriculture growth target of 4% for the period between 2012-2017 is expected to be achieved through farm mechanization. Constant increase in the MSPs for the various crops over the past years has led the power tiller industry to grow consistently at 20-25%. Government’s strategy of providing subsidies of `45,000 (differ from state to state) on tillers is driving the tiller sales. States like Orissa where the subsidy is as high as `60,000 have been showing rapid and robust growth in tiller sales. Government’s rural employment schemes such as NREGA are creating jobs in rural India, which is automatically resulting into shortage of labor, thus spurring demand for mechanization. Tillers and small tractors being some of the most affordable means of cultivation in small farm lands (82% of total farm land holding) are finding robust demand.

Strong market leadership position in expanding tiller market to fuel growth

VSTT reported 25% and 15% growth in sales volumes of tillers and tractors in FY 11 respectively. The tiller industry in India was at 53,000 in FY 11. VSTT had a market share of 44%, while the rest was controlled by KAMCO (23%) and Chinese players.  With strong presence across India except for the Northern parts through 150 dealers, high scalability and a good range of Farm equipment products, we believe VSTT can increase its market share. Supply constraints and reduction of government subsidies may act as a risk to our expectation of market share expansion.

Robust financials and clean balance sheet

Strong revenue growth despite a cap on realizations, consistent margin performance (we have factored in EBITDA margins of 15.5% in FY 12E and 16% in FY 13E), and low interest outgo on almost debt free balance sheet is expected to result in a strong bottomline growth. Additionally with ~42% ROCE, 26% ROE, positive free cash flows, and a healthy dividend payout, the company’s balance sheet looks extremely clean and robust to us.

Outlook and valuation

At CMP of Rs.524, the stock trades 6x times FY 13E EPS of Rs.83.3. We value the stock at 9x times, higher than the one year average of 8x on positive expectations from the company’s strong fundamentals. We thus arrive at a price target of  Rs.750, which is an upside of 43% from current levels.