Hold VST Tillers Tractors; target of Rs 2000: ICICI Direct

ICICI Direct's research report on VST Tillers Tractors

VST Tillers & Tractors (VST) reported a muted performance in Q1FY19, primarily tracking ~25% de-growth in sales volume Power tiller sales volume in Q1FY19 came in at 5,367, down 24.6% YoY while tractor sales volume was at 1,927, down 24.6% YoY Net sales in Q1FY19 came in at Rs 145.6 crore, down 19.6% YoY EBITDA in Q1FY19 was at Rs 18.5 crore, with corresponding EBITDA margins at 12.7%. Margins came in lower tracking negative operating leverage primarily tracking low sales volume and high fixed costs PAT during the quarter was at Rs 14.4 crore, down 49% YoY PAT in Q1FY19 was largely supported by higher than anticipated other income, which came in at Rs 7.2 crore.

Outlook

VST is a debt free, cash surplus, capital efficient company with core RoIC in excess of 22%. However, it is facing headwinds in terms of sales volume growth, which limits the capital utilisation of its new plant and, hence, the limitation of improvement in return ratios. Moreover, the company clocked higher other income in FY18 (Rs 45 crore) primarily tracking gains on equity investments. Going forward, we expect the company to clock other income in the range of ~Rs 25 crore, which will limit PAT growth despite lower double digit growth in sales and EBITDA in FY18-20E. Going forward, we expect sales & EBITDA to grow at a CAGR of 12.6%, 10.2%, respectively, in FY18-20E. PAT, however, is expected at Rs 108 crore in FY20E vs. Rs 112 crore in FY18. We value VST at Rs 2000, i.e. 16x P/E on FY20E EPS of Rs 125 with a HOLD rating on the stock.