VST Tillers & Tractors Research Report

Company
Date of report May 29, 2017
Issuer
Target Price (Rs) 2341
Gain (%) 22
Rationale

In line quarter; Retain Buy

VST Tillers & Tractors’ (VST) 4QFY17 numbers were broadly in line with our estimates. Net sales at Rs2bn grew 11% YoY and 36% QoQ on the back of strong 33% YoY growth in tractor volumes. EBITDA margin for the quarter at 14.6% improved 170bps QoQ, in line with estimates. On a YoY basis, the margin was lower by 200bps due to increase in other expenditure. Absolute EBITDA at Rs288mn sharply improved on a QoQ basis (up 55% QoQ) on higher volumes in tillers and tractors. PAT at Rs175mn (down 10% YoY) was 17% below our estimates due to sharp increase in tax rate during the quarter. Realisation continues to grow YoY due to improving mix comprising higher 27hp tractors. Going forward, the company expects the growth momentum in tractors to continue and is guiding for a double digit volume growth in FY18. In tillers, it expects single digit YoY growth in volumes in FY18. The company has recently launched an upgraded version of the 27hp tractor (Virat Plus) and expects the model to perform well over FY18. The company sold 2,200 units of the 27hp tractors in FY17 and expects to sell 3,500 units in FY18. In the tillers category, it has launched an upgraded version. The management is guiding for a 200bps EBITDA margin expansion in FY18. Capex for FY18 is expected to be closer to Rs1.2bn, with Rs0.8bn for product development and rest towards network and capacity expansion. The company currently has close to 250 dealers and targets 450 dealers by 2021. On new launches, VST said they will be launching a higher HP tiller in FY18. We have retained our estimates and Buy rating on the stock. We believe that the company is likely to deliver strong double-digit earnings CAGR over FY18E/FY19E, given the upcoming new product launches across various segments. VST remains a strong structural bet on farm mechanisation, as it is moving from being a tiller and tractor company to a total agri-solutions provider over the next few years. We retain our Buy rating on the stock with a target price of Rs2,341 (20x FY19E EPS).

EBITDA margin improves QoQ:

For the quarter, realisation continued to improve backed by improving mix of higher tractor sales. The company has taken a moderate price hike during the quarter to pass on the increase in commodity costs. EBITDA margin improved to 14.6% (up 170 bps QoQ) due to lower other expenditure. The management has guided for a 200bps EBITDA margin expansion over FY18.

27hp ramp-up stronger than expected:

Launched at the beginning of FY17, the 27hp tractor has got stronger than expected response. The company has recently launched an upgraded version of the 27hp tractor named ‘Virat Plus’. VST expects this model to do well and sell close to 3,500 units in FY18. Apart from this, the company has launched a 17hp tractor and is going to launch a higher HP tiller in FY18. Focus on market share gains: The company is looking at strong market share gains over the next four–to –five years in the tractor space, aiming for an overall market share of close to 5% backed by new launches. Currently, VST has less than 2% market share in tractors, as is not present in the 30- 40hp and 40-50hp categories, which account for more than 70% of industry volumes. Going forward, the company has a strong product pipeline and will launch power weeders, tillers, new tractors and agricultural implements, which will likely result in market share gains in the coming months.

Retain Buy rating:

We continue to like VST because of its strong product pipe line and robust financials. We believe the company is likely to deliver strong double-digit earnings CAGR over FY17- FY19E, given the upcoming new product launches across various segments. VST remains a strong structural bet on farm mechanisation, as it is moving from being a tiller and tractor company to a total agri-solutions provider over the next few years. We have retained our Buy rating on the stock with a target price of Rs2,341 (20x FY19E EPS).

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