Tractors India Limited (TIL) Research Report: Kotak Securities

Kotak Securities are bullish on Tractors India Limited (TIL) and have recommended a BUY with the following investment rationale:

Tractors India Limited (TIL) is one of the leading players, specializing in the manufacturing of various material handling equipment and distributing a wide range of infrastructure equipment used in construction, mining and power industry.

Tractors India Limited (TIL) has a long standing association of over 60 years with the world leader in construction equipment – Caterpillar. Tractors India Limited (TIL) deals in a wide range of equipment mainly classified into three broad categories 1) MHS (Material handling solutions) 2) CMS (Construction and mining solutions) and 3) PSS (Power system solutions).

Tractors India Limited (TIL) enjoys a healthy market share in its key product categories that translates into an operating margin of 11% and ROE of 22% ROE. On back of its strong balance sheet, Tractors India Limited (TIL) is well poised to benefit from the USD500 bn worth of investments envisaged for various infrastructure projects in India pertaining to the 11th five year plan. Tractors India Limited (TIL) along with its subsidiaries, possesses an extensive distribution network spread across more than 60 service locations in India, providing superior customer accessibility to Tractors India Limited (TIL). Tractors India Limited (TIL) enjoys long standing relationships with renowned customers including Tata Steel, ONGC, Coal India, Hindustan Zinc, BHEL, L&T etc.

In our estimates, we project a 20% CAGR growth in revenues over FY10- 12E from Rs. 10.6 bn in FY10 to Rs. 15.2 bn in FY12E mainly driven by the improvement in infrastructure spending by government as well as by private sector in India and Tractors India Limited (TIL)‘s strong positioning in construction, mining and material handling space.

At current price the stock of Tractors India Limited (TIL) looks attractively valued on a multiple and discounted cash flow basis given the 15% CAGR in projected EPS over FY10-12E.

We initiate coverage on the Tractors India Limited (TIL) stock with a BUY rating and a DCF based target price of Rs.900, over a 12-month horizon.

Key Investment Rationale

– Positive outlook for Infrastructure equipment industry. 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. CMIE (Center for monitoring Indian economy) estimates a 9.2% growth in India’s GDP for FY11 on back of 1) growth in industrial sector by 9.4% 2) 10.3% growth in manufacturing sector 3) 10.3% growth in mining 4) 8.2% growth in services sector. Moreover, Government has highlighted scaling up of infrastructure spending to 9% of GDP by FY12 from current 7% levels.

– Sanguine outlook for all business verticals. Tractors India Limited (TIL) is well poised to grow its consolidated revenues at CAGR of 20% over FY10-12E aided by strong performance in all the three business verticals viz. MHS, PSS and CMS. We believe that going ahead, Tractors India Limited (TIL) would immensely benefit from favourable macro environment, dominant brand perception of Caterpillar products and vivid geographical presence in north/east India and neighboring countries like Nepal, Bhutan etc.

– Long standing association with Caterpillar (CAT). Tractors India Limited (TIL) shares a 65 year old association with Caterpillar (CAT), the world’s leading global construction equipment manufacturer. Tractors India Limited (TIL) enjoys exclusivity in north and east India along with surrounding countries like Bhutan, Nepal and Myanmar. CAT business contributes to over 70% of the company’s top line and going forward we expect the same trend to continue. From the historical view point, Tractors India Limited (TIL)‘s CAT business has grown at a CAGR of 21% and we believe that this would sustain for next three years.