Hold VST Tillers & Tractors; target of Rs 2510: ICICI Direct

ICICI Direct's research report on VST Tillers & Tractors

VST Tillers & Tractors (VST) reported sales volume for June 2017. Power tiller sales volume for the month came in at 4099 units, up 23% YoY (3330 units in June 20 16). Tractor sales volume for the  month  was at 954 units, up 6.1% YoY (899 units in  June 2016) • For the quarter, power tiller sales volume  was at 7119 units, down  2% YoY while tractor sales volume  was at 2555 units, up 18% YoY • This is line with the management guidance of clocking 28000 power  tiller sales volume and ~ 10000+ tractor sales volumes in FY18E • Rebound in power tiller sales volume is encouraging given reported  run rate of 1857 units in May 20 17 and 1163 units in April 2017 • However,  we  believe the sharp run up in the stock price (24%) post  our last update (May 20 17) diminishes our margin of safety on the  stock given the inherent risk of subsidy linked power tiller sales and  uncertain benefits derived out of the incremental capex spend by the  company amidst VST’s transformation from being a prominent  power tiller player to a small tractor player domestically.

Outlook
VST Tillers & tractors (VST) has been a good wealth generator in the past with the stock up more than 50% since our initiation in July 20 15. We were bullish on the farm mechanisation scheme and VST, in particular, given power tiller is the low cost/first entry point farm mechanised product for domestic farmers (given high share of small and marginal farmers). VST has a healthy balance sheet with surplus cash of ~| 190 crore in books as of FY17 and healthy return ratios with RoCE in excess of ~20%.  We have marginally tweaked our estimates, and now expect sales & PAT to grow at a CAGR of 15.5 %, 12.3 %, respectively, in FY17 - 19E. We value VST at | 2510, i.e. 2 4 x P/E on FY19E EPS of | 104. 6 with a HOLD recommendation on the stock. For all recommendations report, click here

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