VST Tillers Tractors Ltd. (VST) CMP Rs. 429 Target NA Rating NA 1 Stock performance (%) 1m 3m 12m VSTT 7% 14% -4% Sensex 7% 6% 6% VST is the leader in Indian power tiller industry with a strong presence in the ~20hp tractor segment. FY13 witnessed weak tiller and tractor volumes due to below normal monsoon and delay in implementation of subsidy schemes by state governments. Monsoon this year has been above normal and our channel checks suggest that most state govts. have announced subsidy on time, driving tiller and lower hp tractor volumes upwards. Over a medium term we expect VST’s growth to be driven by central government push to improve farm power availability (to increase farm yields) and introduction of new products in the 18.5 & 22hp tractor space. We expect a revenue and PAT CAGR of 21% and 16% from FY13-15 and expect VST to maintain its leadership in the power tillers space. In tractors, while VST would remain a small player, it would continue to maintain a strong presence in the 18.5 & 22hp segment by way of new launches and expanded capacity. The stock trades as 5.7x FY15 EPS, which we believe leaves room for strong upside. Increase in farm power requirement: Government push by way of direct subsidies on tillers/small tractors and by setting up custom hiring centers is expected to drive demand for tillers/small tractors. VST, being the leader is expected to be one of the key beneficiaries of improving demand. Moreover, our channel checks suggests that the depreciating INR has made Chinese tillers more expensive (price is the USP). Also, at the beginning of FY14, govt approved a ~7% price hike for VST. With 18% tiller volume CAGR for 10 year prior to FY13, we believe FY13 was an aberration and expect volumes to pick-up in FY14 & FY15 New products and capacity: The new plant at Hosur is expected to be operational in November-2013, taking capacity of tillers to ~60,000 and tractors to ~30,000 units (from 10,000). In the past, VST has also had issues with vendor capacity and supply chain. While the issues have largely been resolved, new products roll out (two wheel drive variants, 22 hp tractors, high speed variants) coupled with an existing large network of 150+ dealers is expected drive revenue growth Maintaining balance sheet quality and capital efficiency: Being largely dependent on subsidies, receivables could remain elevated. However, over the last ten years VST has successfully kept a check on working capital (except for FY12) by way of higher dealer deposits, Incentives & marketing expenses payable to dealers and advances from dealers. VST is debt free and has maintained ~25% RoE over the last 10 years. Payout and valuations: Dividend payout has averaged 19% over the last 12 years, however last five year average is 16% (reduced for capex of new plant). Stock has traded at average 7.3x fwd PE in the last four years. Currently at 5.7x FY15 EPS. We believe valuations are attractive given the earnings growth and balance sheet quality Financial summary Year Revenues (Rs. mn) EBITDA (Rs. mn) Adj. PAT (Rs. mn) Adj. EPS (Rs.) P/E(x) EV/EBITDA(x) FY13 4,817 722 486 56.2 7.6 4.7 FY14E 5,957 863 576 66.6 6.4 3.9 FY15E 7,055 986 654 75.7 5.7 3.3 Quality play on farm mechanisation and improving penetration in agri-machinery Find Spark research on Bloomberg (SPAK <go>), Thomson First Call, Reuters Knowledge and Factset Date Sep 23, 2013 Market Data SENSEX 19901 Nifty 5890 Bloomberg VSTT IN Shares o/s 8.6mn Market Cap Rs. 4bn 52-wk High-Low Rs. 526-330 3m Avg. Daily Vol Rs. 4mn Index member BSESMCAP Latest shareholding (%) Promoters 53.9 Institutions 7.6 Public 38.6 Mukesh Saraf [email protected]+91 44 4344 0041 Narayanan Ravindranathan [email protected]+91 44 4344 0020 Company Update
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VST Tillers Tractors Ltd. (VST) CMP
Rs. 429
Target
NA
Rating
NA
1
Stock performance (%)
1m 3m 12m
VSTT 7% 14% -4%
Sensex 7% 6% 6%
VST is the leader in Indian power tiller industry with a strong presence in the ~20hp tractor segment. FY13
witnessed weak tiller and tractor volumes due to below normal monsoon and delay in implementation of subsidy
schemes by state governments. Monsoon this year has been above normal and our channel checks suggest that
most state govts. have announced subsidy on time, driving tiller and lower hp tractor volumes upwards. Over a
medium term we expect VST’s growth to be driven by central government push to improve farm power
availability (to increase farm yields) and introduction of new products in the 18.5 & 22hp tractor space.
We expect a revenue and PAT CAGR of 21% and 16% from FY13-15 and expect VST to maintain its leadership in
the power tillers space. In tractors, while VST would remain a small player, it would continue to maintain a strong
presence in the 18.5 & 22hp segment by way of new launches and expanded capacity. The stock trades as 5.7x
FY15 EPS, which we believe leaves room for strong upside.
Increase in farm power requirement: Government push by way of direct subsidies on tillers/small tractors and by
setting up custom hiring centers is expected to drive demand for tillers/small tractors. VST, being the leader is expected
to be one of the key beneficiaries of improving demand. Moreover, our channel checks suggests that the depreciating INR
has made Chinese tillers more expensive (price is the USP). Also, at the beginning of FY14, govt approved a ~7% price
hike for VST. With 18% tiller volume CAGR for 10 year prior to FY13, we believe FY13 was an aberration and expect
volumes to pick-up in FY14 & FY15
New products and capacity: The new plant at Hosur is expected to be operational in November-2013, taking capacity of
tillers to ~60,000 and tractors to ~30,000 units (from 10,000). In the past, VST has also had issues with vendor capacity
and supply chain. While the issues have largely been resolved, new products roll out (two wheel drive variants, 22 hp
tractors, high speed variants) coupled with an existing large network of 150+ dealers is expected drive revenue growth
Maintaining balance sheet quality and capital efficiency: Being largely dependent on subsidies, receivables could
remain elevated. However, over the last ten years VST has successfully kept a check on working capital (except for
FY12) by way of higher dealer deposits, Incentives & marketing expenses payable to dealers and advances from dealers.
VST is debt free and has maintained ~25% RoE over the last 10 years.
Payout and valuations: Dividend payout has averaged 19% over the last 12 years, however last five year average is
16% (reduced for capex of new plant). Stock has traded at average 7.3x fwd PE in the last four years. Currently at 5.7x
FY15 EPS. We believe valuations are attractive given the earnings growth and balance sheet quality
Financial summary
Year Revenues (Rs. mn) EBITDA (Rs. mn) Adj. PAT (Rs. mn) Adj. EPS (Rs.) P/E(x) EV/EBITDA(x)
FY13 4,817 722 486 56.2 7.6 4.7
FY14E 5,957 863 576 66.6 6.4 3.9
FY15E 7,055 986 654 75.7 5.7 3.3
Quality play on farm mechanisation and improving penetration in agri-machinery
Find Spark research on Bloomberg (SPAK <go>), Thomson First Call, Reuters Knowledge and Factset
Low/ Moderate Machanisation & High / Average Yield: 7 States (Rice Based)
Goa
Meghalya
KeralaTripura
WB
ManipurUttarakhand
Punjab
Haryana
TN
AP
UP
Average farm power availability for the cultivated areas of the country has increased from 0.48 kW/ha in 1975-76 to 1.73 kW/ha at present and is likely to
rise to 2.0 kW/ha by 2017. Shrinking landholding size with majority of the farmers being small and marginal is also making individual ownership of
Multiple drivers for mechanisation exist; marginal land holding is the key road block
Productivity
•Historically farm productivity has had a positive correlation with increased availability of farm power (mechanisation)
•Mechanisation improves utilisation efficiency of inputs
•Mechanisation improves timeliness leading to higher cropping intensity
Replaces human and animal labour
•Mechanisation is more efficient than conventional farm power sources
•At optimum utilisation mechanisation is cheaper than human and animal labour
Weather risk mitigation
•Mechanisation helps in flexibility in sowing, harvesting etc. as the time taken to do these activity reduces substantially
Savings in
• Seeds: 15-20%
• Fertilizer: 15-20%
• Time: 20-30%
Increase in
• Cropping intensity: 5-20%
• Farm productivity: 10-15%
• Reduction in manual labour : 20-
30%
Estimates of contribution from
mechanisation
~ 83% of farmers have average land holing < 2ha, accounting for 41% of agri
land; avg holding down to 1.23ha in 2006 from 1.33 in 2001 and 1.41 in 1996
Average no. of farm equipment/machinery possessed per 1000 farmer household in land
class (ha)
< 0.01 0.01–
0.40
0.41–
1.00
1.01–
2.00
2.01–
4.00
4.01-
10 > 10
All
Size
Plough 49 292 568 775 889 1030 1189 569
Harrow, Seed drill,
sprayer & duster
64 165 354 481 685 1051 1512 389
Thresher 2 19 43 53 74 106 198 44
Power Tiller 0 1 4 15 33 75 148 13
Tractor 2 2 22 25 75 189 375 29
Source: Company, Spark Capital
• Tractor and tiller penetration is significantly low
in < 2ha land holding category
• While the above mentioned factors are positive
for mechanisation, small land holding is the key
road block for mechanisation to pick up
• Small and marginal land holdings lead to
adverse economies of scale
• High cost of ownership leads to unaffordability
by small and marginal farmers (despite
subsidies)
• Poor credit worthiness leads to unavailability of
loans
VST Tillers Tractors Ltd. (VST) CMP
Rs. 429
Target
NA
Rating
NA
8
Govt. plans to push ‘Custom Hiring’ to improve mechanisation among small farmers
• In order to lay special emphasis on farm mechanization and to bring more inclusiveness, a dedicated Sub-Mission on Agricultural Mechanization (SMAM)
for the XII Plan has been proposed with an estimated outlay of Rs.20bn for the entire plan period
•One of the key components of SMAM is to establish Farm Machinery Banks for Custom Hiring. The idea is to offset the adverse ‘economies of scale’, ‘high
ownership costs’ and ‘low credit worthiness of small farmers’ by providing farm machinery on hire to farmers
•The plan also looks to establishing Hi-Tech productive equipment centres to target low productive agricultural regions
• SMAM would also provide appropriate farm equipment to farmers based on the crop, region and agro climatic conditions
•Procurement subsidy will be provided for establishment of custom hiring centers. Financial support to private entrepreneurs for setting up custom hiring
centers through creation of Credit Guarantee Fund and Venture capital fund
Assistance provided under SMAM
Program Pattern of
assistance
Implementing
Agencies
Beneficiaries
Custom
Hiring –
Farm
Machinery
Banks
50% of cost of
procurement - limit
of Rs. 3mn per
Centre
State
Government
Individual Entrepreneurs/Self
Help Group (SHG)/ User
Groups (UG) of farmers,
Cooperative Societies of
Farmers
Hi-tech
centres
40% of cost of
procurement - limit
of Rs. 10mn per
hub
State
Government
Individual Entrepreneurs /Self
Help Group (SHG)/ User
Groups (UG) of farmers,
Cooperative Societies of
Farmers
Source: Company, Spark Capital
GoI – Ministry of
Agriculture
Credit
Guarantee Fund
Implementing
Agency
Entrepreneurs
• To begin with GoI would contribute 100%
of the corpus. Later banks, manufacturers
are expected to join and increase the
corpus
• Upto 80% of initial capital costs will be
financed/refinanced by the CGF holders.
20% will come from entrepreneurs.
Assets created will be hypothecated
• All individuals/cooperatives/NGOs eligible
to avail the facility
• Entrepreneurs will be provided three
years grace period that include EMI and
interest. Opportunity cost for far going
EMI / interest will be adjusted against
CGF
VST Tillers Tractors Ltd. (VST) CMP
Rs. 429
Target
NA
Rating
NA
Segment FY10 FY11 FY12 FY13 1QFY14
0-20 hp 3,758 4,735 7,033 18,468 5,730
YoY% 61% 26% 49% 163% -4%
% of total 0.9% 0.9% 1.2% 3.1% 3.1%
VST 100% 100% 100% 36.0% 30.1%
M&M - - - 57.1% 57.3%
21-30 hp 66,025 70,194 75,753 36,780 13,832
YoY% 33% 7% 1% -51% 66%
% of total 15.9% 13.7% 12.5% 6.2% 7.4%
M&M 50% 55% 55% 27% 56%
TAFE 30% 29% 30% 59% 38%
31-40 hp 202,127 226,555 250,701 238,955 65,177
YoY% 28% 12% 11% -5% 0%
% of total 45.9% 41.6% 41.3% 40.4% 34.9%
M&M 43% 44% 41% 38% 39%
TAFE 32% 31% 36% 35% 28%
41-50 hp 105,811 154,037 168,695 214,864 85,519
YoY% 25% 46% 10% 27% 70%
% of total 24.0% 28.3% 27.8% 36.4% 45.7%
M&M 27% 26% 28% 44% 42%
TAFE 11% 11% 15% 16% 25%
> 51 hp 62,484 89,619 105,481 81,848 16,700
YoY% 30% 43% 18% -22% -25%
% of total 14.2% 16.4% 17.4% 13.9% 8.9%
International
Tractors 13% 13% 13% 21% 26%
John Deere 34% 32% 29% 27% 25%
Total 440,208 545,108 607,663 590,915 186,958
9
VST remains a small player in tractors; does not plan to enter the > 30hp space
Source: Company, Spark Capital
•Until FY12, VST was practically the only player in the 0-20 hp segment,
post entry of M&M and a few others, VST tillers’ share in the segment
declined significantly. However, the segment itself clocked a steep
growth and grew 2.5x in FY13
•The entry of new players in the segment coincided with supply side
issues for VST, which saw tractor volumes decline 11% yoy in FY13
•M&M’s Yuvraj, which is a 15 hp two-wheel drive tractor was the major
growth driver of the segment. In comparison, VST’s 18.5 hp tractor is a 4
wheel drive variant and is used extensively in Maharashtra and Gujarat
regions in wine yards.
•For VST tillers, the sub-30 hp category is the key as the upcoming
products (recently launched a 22 hp tractor) would be in the 22 – 30 hp
segment. VST also plans to launch two-wheel drive variants of the 18.5 h
and 22 hp tractor in the near future
•With the steep increase in capacity for VST, launch of new products and
overall growth in the sub 30 hp segment, we expect VST to see a tractor
volume CAGR of ~17% from FY13 – FY16. From FY06 – FY13, VST
witnessed a tractor volume CAGR of 26%, albeit on a low base
•We note that being in the < 30 hp category, VSTs tractors would
continue to be driven by subsidies provided by state and central
government
•With a strong position in tillers and a pan India network, we expect VSTs
new products to do well as it continues to cater to the small/medium
farmers who plan to upgrade from a tiller. Moreover, smaller tractors
would also cater to farmers who also want to use tractors for non-farm
purposes
VST Tillers Tractors Ltd. (VST) CMP
Rs. 429
Target
NA
Rating
NA
10
Good Kharif monsoon so far; strong reservoir positions augur well for Rabi
Rabi is expected to be good driven by strong reservoir positions
Source: CWC, Spark Capital
Percentage of full reservoir level (FRL) 100% 91%-99% 81%-90% 71%-80% 61%-70% 51%-60% 41%-50% <40%
Others Flour mill, huller, flaking machine, chaff cutter As per engine HP
Source: Company, Spark Capital
VST Tillers Tractors Ltd. (VST) CMP
Rs. 429
Target
NA
Rating
NA
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Absolute Rating Interpretation
Buy Stock expected to provide positive returns of >15% over a 1-year horizon
Add Stock expected to provide positive returns of >5% – <15% over a 1-year horizon
Reduce Stock expected to provide returns of <5% – -10% over a 1-year horizon
Sell Stock expected to fall >10% over a 1-year horizon
Recommendation History
Date CMP Target price Rating
- - - -
- - - -
- - - -
- - - -
- - - -
VST Tillers Tractors Ltd. (VST) CMP
Rs. 429
Target
NA
Rating
NA
Analyst Certification of Independence
The views expressed in this research report accurately reflect the analyst’s personal views about any and all of the subject securities or issuers; and no part of the research
analyst’s compensations was, is or will be, directly or indirectly, related to the specific recommendation or views expressed in the report.
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Disclosure of interest statement Yes/No
Analyst ownership of the stock No
Group/directors ownership of the stock No
Broking relationship with the company covered No
Investment banking relationship with the company covered No