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VST Tillers Tractors Ltd.

Retail Research Desk Company Note 17th August 2010

CMP (BSE) Rs. 487.00 Recommendation - Buy


Key Data Company Background
V.S.T Tillers Tractors Ltd (VSTTL) was incorporated in the year 1967 in
BSE Code 531266
Sensex 18048.45
Bangalore, India for the manufacture of Power Tillers and Diesel Engines.
2w Avg Qty 9,045 The plant went into production in the year 1970 in collaboration with
M. Cap. (cr) 420 Mitsubishi Heavy Industries, Japan which also holds a small stake in the
52 wk H/L 589.90/226.44 company.
Face Value 10
Industry Tractors/ Farm Equip
The main products of the Company namely Power Tillers, Tractors, Paddy
Transplanter and Diesel Engines which are used in the agricultural sector
all over the India. The company also exports its products to Africa, Middle
Share holding, Jun’10 % Holding East, Turkey and Russia. The Company has a nation-wide network of 220
Indian Promoter 54.78% Dealers supported by Sales and Service. These also impart knowledge to
Total FIIs 2.29% the farmers regarding mechanization and use of equipment.
DII 3.53%
Others 39.40%
Investment Rationale:
Total 100%  VST Tiller has majority share in the Indian Tiller market of 40%. It
sold near 19,000 tillers last year to the 50,000 units sold in the
country.
Particlars FY10 FY09  With increased mechanization and scarcity of agricultural labour,
Total Operating the demand for power tillers is growing at a frantic pace. The
Income (Cr.) 344.54 274.14 growth in the segment is supposed to be 40% yearly for the next
PAT (Cr.) 61.8 44.14 couple of years.
Ratios
 The main competition is from Chinese tillers. For this the company
had tied up with a Chinese company to sell their tiller in India
RONW (%) 32.01% 31.38% under the VST brand (VST Dragon) and this was boding well. Due
PAT Margin 17.93% 16.10% to some issues, the Chinese company was unable to supply tillers
for the last two months and this has affected the Q1FY11 results.
The company has entered into an agreement with a new company
in China and this problem seems sorted out for now.
Price performance vis-à-vis Sensex  The market for tillers in China is 6,00,000 units so there is lot of
scope in India (at just 50,000 units) for tillers in comparison to
China when we compare it to the ratio of arable land in both the
countries. Also, majority of Indian farmland holdings are small and
fragmented which are ideally suited for power tillers.
 The company also plans to introduce other agri-based machinery. It
has started by selling rice transplanter for which it has got a very
good response. There are plans to push more products soon.
 The company has surplus land in Whitefield, Bangalore and
Mysore. The land in Mysore will be disposed by the company
provided they find a right price.
 The company is debt free and generates a return on equity well
Source: www.bseindia.com above 30% consistently.

Concerns:
 The company receives majority of payment from State
Mohit Rathi
Governments as it depends on subsidy. So, there are instances of
Research Analyst delay in payments resulting in working capital crunch. Also,
change in subsidy structure could hamper prospects.
mohitrathi@spagroupindia.com
 Increased competition in the domestic tiller market could affect
market share and increase component prices.
VST Tillers Tractors Ltd.
Retail Research Desk Company Note 17th August 2010

Overview:
VSTTL is a company that is poised to benefit from rising 2500

mechanization of Indian agriculture. With good monsoons and 2000

firm crop prices, we expect the company to show robust growth 1500 2007-08

in sales and profits with some margin compression due to raw 1000 2009-10

material prices this year. We can be confident about this as we 500


2010-11

see a consistent upward trend in the Minimum Support Prices 0


(MSP) offered by the government to the farmers. This can be Wheat Rice Maize Arhar Cotton
Source: http://dacnet.nic.in/eands/msp.htm
very clearly seen in the adjacent graph.

The company’s management is confident of retaining its market share in the coming year and plans to increase
awareness about its products by encouraging dealers to organise workshops for farmers. The management is also
clear on not amassing any kind of debt and wants to increase capacity on a big scale. They are confident of meeting
the demand through gradual expansion in the plants in Bangalore and Mysore. As we can see below in the chart,
the main threat is from Chinese tillers which the company partly addresses by selling its own version of a Chinese
CKD. Also, with the market becoming a bit mature, farmers prefer to spend a bit more on buying a more reliable
product with an after sales service instead of buying a cheap Chinese tiller.

Market Share of Tillers, 2010

Others
5%
Chinese VSTTL
30% 40%

KAMCO
25%

The company has shown tremendous growth in the past 3 years due to a small base. The Chinese supplier problem
plagued the Q1 result this year. Since that issue is sorted out, we expect the company to recover and post a 12.7%
growth in profits this year on a conservative estimate. This also takes into account the expenditure on workshops
and higher expected cost of raw materials.

Considering the good prospects going forward, we initiate a buy on this scrip at CMP Rs. 487 with a target of
Rs.641 based on a forward PE multiple of 11.5 on FY11E EPS.

Key Financials FY 09 FY 10 FY 11E FY 12E


Turnover (Rs. Cr) 274.14 344.54 397.40 460.83
Growth (%) 45.37 25.68 15.34 15.9
PAT 28.91 42.33 48.2 57.85
Growth (%) 101 46.5 12.7 20.1
EPS 50.20 48.99* 55.8 66.95
Dividend (Rs.) 7.5 7.5* 10 15
*due to Bonus declared in 1:2 ratio in FY10
VST Tillers Tractors Ltd.
Retail Research Desk Company Note 17th August 2010
Disclaimer: This report is for the personal information of the authorized recipient and does not construe to be any investment, legal or taxation advice to you.
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Disclosure of Interest Statement


1. Analyst ownership of the stock - Yes
2. Group/Directors ownership of the stock – Yes
3. Broking relationship with company covered – No

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