VST Tillers: Sushil Finance’s Research Report

Sushil Finance is bullish on VST Tillers Tractors and has recommended buy rating on the stock with a target of Rs 592 on the following investment rationale:

VST Tillers Tractors is in the business of manufacturing & sales of farm equipment such as Power Tillers, Tractors, Paddy Transplanters, Diesel Engines, and components in India. VST Tillers Tractors also exports its products to Africa, Middle East, Russia, Turkey, Europe, Korea, Thailand, etc.

With annual agriculture growth target of 4% for the 12th plan (2012-17), the government has increased its emphasis on farm mechanization to enhance food production. The demand of farm equipment such as Power Tiller, Tractors, Combine Harvesters, Rice transplanters, etc has been robust in the recent years, mainly due to increase in income level of farmers as minimum support price (MSP) for their crops has been enhanced constantly by the government.

Additionally, the acute shortage of labor resources and continued subsidy scheme by government to encourage farmers to buy farm equipment in order to improve productivity has further increased the farm equipment’s demand. The central government provides a subsidy of Rs. 45,000 for Power Tillers, while some governments such as Karnataka & Orissa give subsidy in the range of Rs. 50-60 thousand. Going forward, with acute shortage of farm labor and consistent government support in the form of subsidy along with bank loan availability at subsidized rate due to government’s focus on priority sector lending, we believe the demand for farm equipment (especially Power Tillers & sub 20 HP Tractors) is expected to be robust over the next few years.

VST Tillers Tractors is the largest manufacturer of Power Tillers in India with about 45% market share. It has delivered a strong CAGR of 27% in Power Tillers sales during last 5 years (FY06-11). During FY11, VST Tillers Tractors sold 23,449 Power Tillers for Rs. 2,620 mn as against 19,068 Power Tillers sold for Rs. 2,120 mn during FY10, registering a 23% growth in volume term and 23.6% growth in sales value. The annual market size of Power Tillers is about 53,000 and it is growing at very healthy rate of about 20%, mainly due to fast mechanization of agricultural industry. VST Tillers Tractors, being the market leader with its nation-wide strong network of 160 dealers supported by Sales and Services network, is expected to grow its Power Tiller Revenues by 20-25% over the next 2-3 years.

VST Tillers Tractors‘s manufacturing plant is located in Bangalore and currently has a combined manufacturing capacity of 36,000 Power Tillers & Tractors (on a double shift basis). With continued strong demand for VST Tillers Tractors’s Tractors, VST Tillers Tractors is expanding its Tractor manufacturing capacity by shifting its Tractor production to Hosur, Tamilnadu, Where it has already purchased land and has started the construction of facility, which is expected to be completed by May-June 2012. VST Tillers Tractors will have manufacturing capacity of 12,000 Tractors (in single shift) from Hosur and the current plant in Bangalore would entirely be available for Power Tillers. The cap-ex for this new plant would be about Rs. 1 bn and VST Tillers Tractors has already spent Rs. 250 mn during FY11. Post the completion of its current expansion, VST Tillers Tractors will be having capacity to produce 36,000 Power Tillers & 24,000 Tractors per annum (on a double shift basis). VST Tillers Tractors, being a leading player in sub 20 HP tractors segment, is expected to grow its Tractors Revenues at a +25% CAGR over the next 2-3 years.

Farm mechanization in India is essential to improve productivity and overcome the labor shortage issue. The government’s subsidy encourages farmers to buy farm equipment and drives overall demand for Power Tillers and low HP Tractors amongst others. VST Tillers Tractors, being an established player in farm equipment segment, is very well placed to grow at decent rate for next 2-3 years. Based on its FY11 performance & business growth outlook, we expect VST Tillers Tractors’s Net Revenues to grow by 22.6% & 20.4% to in FY12E & FY13E, respectively. At the CMP of Rs.475, VST Tillers Tractors’s valuation looks very attractive at 7.7x & 6.4x its FY12E & FY13E EPS of Rs.61.7 & Rs.74 respectively. We initiate our coverage on VST Tillers Tractors with a Buy rating & target price of Rs.592 (8x FY13E EPS).