Accumulate VST Tillers; target of Rs 592: Sushil Finance

“Farm mechanization in India is essential to improve productivity and overcome the farm 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, being an established player in farm equipment segment, is very well placed to grow at decent rate for next 2-3 years. VST has delivered a decent performance during Q1FY12 with strong growth in its Revenues, while a sharp increase in key Raw Material prices negatively impacted its EBITDA margins. However, the margins are expected to stabilize at current level with some easing in RM prices expected, as they have already at elevated level. Going forward, VST is expected to deliver strong 35%+ growth in Tractors’ sales and about 20%+ growth in Power Tillers’ sales, while maintain its margins at 14% to 15% level. Hence, considering its Q1FY12 performance, while we have slightly increased our FY12E & FY13E Revenues estimates, we have largely maintained our FY12E & FY13E APAT estimates.”

“VST Tillers Tractors Ltd (VST), which is the largest player in Power Tillers segment in India and a leading manufacturer of farm equipment such as sub 20 HP Tractors, Paddy Transplanters, Diesel Engines, etc, delivered Revenue growth of 21.2% & APAT growth of 14.5% on YoY basis during Q1FY12.”

“During Q1FY12, its Revenues grew by 21.2% YoY to Rs. 1,113.6 mn driven by strong growth in its Tractors’ sales volume. Its Tractors’ sales volume grew by 50.2% YoY to 1420 during Q1FY12 from 945 during Q1FY11. However, its Power Tillers’ sales volume grew 12.2% YoY to 5,885 from 5,245 in Q1FY11. While the average Realization of Power Tiller remained flat during Q1FY12 at Rs.1,13,850/unit against its average realization for FY11, the realization of Tractor increased by 1.7% to at Rs. 2,25,352/unit against its average realization for FY11. As the company increased prices by about 3% during the month of June 2011, the full impact of which will start reflecting from Q2FY12 onwards and partially offset the impact of increased Raw material cost and stabilize its margins at current level. While the sales growth in Tractors segment was very strong during Q1, the sales growth in Power Tillers segment was slightly lower than the expectations, though is expected to accelerate in upcoming quarters and the management maintains its 20% growth target for its Power Tillers’ sales and expects about 35% growth in Tractors’ sales during FY12.”

“During the quarter, its EBIDTA grew by just 6.4% YoY to Rs. 164.7 mn as its EBIDTA margins declined by 200 bps YoY to 14.6%. The decline in margins can be attributed to sharp increase in prices of key Raw Materials and its continued constraint in sourcing components from its vendors. However, the company is taking steps to ensure components availability from vendors, and expects its EBITDA margins to stabilize between 14% & 15% during FY12. Its PBT including other income grew by 10.4% YoY to Rs. 171.3 mn, while its APAT grew by 14.5% YoY to Rs. 112.7 mn.”

“We now expect VST’s Net Revenues to grow by 25.3% & 21.7% to Rs. 5,328.4 mn & Rs. 6,484.8 mn in FY12E & FY13E, respectively, while its Net profits to grow by 12.4% & 23.1% to Rs. 519.1 mn & Rs. 639.2 mn in FY12E & FY13E, respectively. At the CMP of Rs. 504, VST’s valuation looks quite attractive at 8.4x & 6.8x its FY12E & FY13E EPS of Rs. 60.1 & Rs. 74.0 respectively. We recommend an ‘Accumulate’ on the stock with a target price of Rs 592,” says Sushil Finance research report.

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