A quality report by JainMatrix Investments

VST Tillers Tractors Agro growth

Here is a note on VSTT (VST Tillers and Tractors Ltd).

Date 4 Mar 2014, CMP: Rs 825 Small Cap Mkt Cap 716 crores Advice: Buy

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Business Overview
VSTT is an agriculture equipment manufacturing firm with products like tractors, power tillers and rice planters. Its turnover in FY2013 was 482 crores, with profits at 49 cr. Market Cap. today is 716 cr, at CMP 825. The mfg plant is at Whitefield, Bangalore for all 3 products with capacities of tractors (5k), tillers (25k) and engines (32k). It has commissioned a new tractor plant in Hosur, TN with capacity of 36k tractors. (k=1000) VSTT has tie ups with several companies of Mitsubishi of Japan for tractors, tillers and diesel engines. The Sales numbers in FY13 were tractors (6,233), power tillers (21,231) and rice planters (404). Products are also exported Forex revenues in FY13 were 16 cr., while imports were 21 cr., a net importer. Domestic sales are through a nation-wide network of Dealers. See segments Fig 1. Shareholding pattern is Promoters - Indian 51%, Foreign 3%, MF/FII/Institutions 7.8%, Individuals 30.2%, Bodies Corporate 6.4% and Others 1.6%. It appears to be widely distributed in Retail.

Capacity Expansion
The Hosur plant set up with 70 cr investment was funded through internal accruals. It will have a 36k tractor capacity. At full capacity it will generate revenue of 890 crores. Thus in a 2 year period the current revenues can triple. (JainMatrix estimates based on FY13 tractor average revenue of 2.47 L/unit) Tractor is a fast growing segment, and the projected sales volume will be 7.1% market share (of FY13 market). To expand exports, VSTT has successfully homologated and obtained export certification to expand its global footprint for tractors, for the current markets of Africa, Middle East, Russia and Turkey, and beyond. This aggressive growth plan looks possible.

Agriculture Sector
In India, agriculture is a steady industry with a growth rate of 3.3 % (CAGR) over last 7-8 years. The projection for FY14 is 4.8% growth, compared to FY13 with just 1.9% growth. (per PMs Economic Advisory Council). VSTT represents the mechanisation and automation requirements of farming. This trend is visible with the rising cost of rural labour and productivity pressures.

 Food demand in India is inevitably surging as 1) the population grows 2) improving affluence of population, all results in 3) better diet and nutrition levels. Government also encourages agriculture with tax concessions for farmers and funding schemes for their investments. It also raises Minimum Support Price (MSP) for produce and buys from farmers at higher rates. The Power Tiller industry relies heavily on Government subsidies and schemes for funding purchases. The Indian tractor market is the largest in the world. Tractor sales in FY13 were 5,90,672 units. Thus VSTT at 6,233 has just 1% of the Indian tractor production.

Share Overview, Financials and Valuations

Fig 2

Fig 3 The Share of VSTT with FV=10 has risen sharply by 151% in last 1 year. See Fig 2. Its a regular dividend stock, and the 90% dividend declared has a yield of 1%. There was a bonus with ratio 1:2 in 2010.

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 Revenues, EBITDA and PAT have grown at 18%, 21% and 22% CAGR over a 5 year period. See financials Fig 3. Margins are showing an improving trend over the last 3 years. Current P/E is 9.8 times (TTM). Price/ Book is 2.9 times. The FY14 estimate shows a good upside on EPS. The projected P/E based on this will be 9.2 times. Cash flow has been mostly positive or a small negative, see Fig 4. Debt is zero, and cash on hand is 32.9 cr, about Rs 38/share. ROCE is 29% and RONW is 18%. These are very high, and also may rise in 1-2 years with new capacities. PEG at 0.38 indicates undervalued status.

Fig 4

Overall Opinion
VSTT is a firm riding on three clear trends: Automation in Indian farming is up as farming incomes rise even as rural wage costs inflate. Massive expansion of VSTT tractor manufacturing capacity which can triple revenues in 2 years. FY14 will be a very good year for Indian agriculture, providing incomes needed to invest in automation.

Based on all this, VSTT is an aggressive agriculture growth stock. Buy with a 2-3 year perspective.

Disclaimer
This document has been prepared by JainMatrix Investments Bangalore (JM), and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of JM. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, JM has not independently verified the accuracy or completeness of the same. Neither JM nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipients particular circumstances and, in case of doubt, advice should be sought from an independent expert/advisor. Either JM or its affiliates or its directors or its employees or its representatives or its clients or their relatives may have position(s), make market, act as principal or engage in transactions of securities of companies referred to in this report and they may have used the research material prior to publication. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com

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