VSt Tillers and Tractors limited


(Hitesh Patel) #1

I would like to initiate a long term pick which fulfills most of the criteria of long term investment worthiness in a stock.

VST tillers and tractors is a market leader in tillers with around 50% market share and also has presence in the smaller capacity tractors.

cmp 475 MARKET CAP 408 CRORES.

FY 10 EPS around 49 so available at around 10 PE

Turnover has grown from 111 crores in fy 06 to 345 crores in FY 10.

Networth has increased from 48 crores to 127 during fy 06-fy 10.

Net profits have gone up from 5.9 to 42.33 crores during fy 05-fy 10.

Current book value around 146.

Stock has consistently maintained very high ROE and other return ratios.

Debt free company.

BEST PART OF THE COMPANY IS THE AMAZING CONSISTENCY DISPLAYED IN THE SALES AND NET PROFITS WHERE THERE HAS NEVER BEEN A SINGLE DOWN YEAR IN TERMS OF SALES AND PROFITS SINCE FY 05 WHICH IS AS FAR AS I MANAGED TO LOOK.

FIRST HALF RESULTS

SALES ARE 200 CRORES VS 168 CR (H1FY10)

NET PROFITS 21.34 CR VS 19.8 CR

HERE IT MUST BE NOTED THAT USUALLY THE MARCH QUARTER WHICH IS THE LAST QUARTER IS THE BEST QUARTER AND QUARTERLY RESULTS ARE OFTEN LUMPY THOUGH NOT BAD.

**YEAR 05 06 07 08 09 10 H1FY11 **

SALES 111 130 163 189 275 345 200

NP 5.9 7.4 12.5 14.4 29 42 21

Positives:

Good management

Reasonable valuations for a company which has shown consistent growth with good balance sheet and good return ratios

Although there is no question of company selling its land at Bangalore, the valuation of its land at Bangalore gives a lot of valuation comfort to the investor.

Govt focus on agri sector is slated to continue and in fact increase.

Negatives:

Entry of some bigger player into tillers space might impact growth of the company.

Lumpy quarterly earnings which often leads to high price volatility.

There is often some delay in collecting subsidy from govt provided on tillers.

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THE STOCK HAS BEEN PARTIALLY RERATED BY THE MARKETS IN THE PAST FEW MONTHS BUT STILL I FEEL BASED ON THE CONSISTENCY IN EARNINGS IT IS EXPECTED TO BE FURTHER RE RATED AS MORE FUNDS/FII ENTER THE STOCK (WHENEVER THEY DO.)

PLUS THE EARNINGS ARE EXPECTED TO KEEP CHUGGING ALONG AT AROUND A CONSERVATIVE 15-20%.

Would like views of fellow investors.


(Abhishek Basumallick) #2

Hitesh…this looks good…kind of company I understand and like :slight_smile:

A few quick questions:-

  1. Any ideas on the market share of VST?
  2. Traditionally, tractor sales have been high in North India and not so good in other parts of the country. VST is based out of Bangalore (I think). So, is that an advantage or disadvantage?

I think, one point you missed here is that VST has a technical collaboration with Mitsubishi and sell a lot of re-branded Mitsubishi products. Worldwide, Mitsubishi and John Deere and majors in tractors and technical collaboration with them is a definite plus point for VST.


(Hitesh Patel) #3

Hi

VST Tillers has around 50% market share. It has distribution network in many states. More details about their sales network etc is available on their website.

Thanks about the Mitsubishi news.


(Nigam) #4

Thanks for the idea Hitesh. I will look into this.

Btw, what criteria do you use to screen stocks and which screener ?


(Hitesh Patel) #5

Hi Nigam

Welcome aboard.

regarding ur query about criteria to screen stocks the most important criteria I follow is consistency in growth from where looking at stocks begin. After that I usually look at the balance sheet strength whether it has been stretched while pursuing growth. If not then the study goes further to look at the return ratios, future prospects, and then most important is the valuation at which I buy the stock. Often it requires turning over a lot of stones but ultimately I do manage to find out some stocks worth intensive study where I go all out and look at in depth and then finally when it looks suitable for long term investment, I buy my long term bets.

I havent used any stock screeners for looking at stocks till now. Maybe now on I might give them a try since there are a lot of screeners available esp on fourstocks and here on value pickr etc but I am not too savvy using these screeners.

regarding vst tillers, I feel markets tend to look at quarterly numbers too much in this stock besides profit margins on quarterly basis and hence missing bigger picture which is that of almost amazing consistency in growth. And valuations of around 7-8 times based on forward earnings.

regards

hitesh.

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(Siddharth Shukla) #6

I am waiting patiently for this stock to correct more, not yet cheap enough for me if one normalizes earnings. the company has grown NPM from 5.7% in 2006 to 12.3% in 2010 and if it were to mean revert for any reason(also raw material costs may hurt) it doesn’t appear very cheap anymore. Sanjoy Bhattacharya recommended this stock at about 257 so its still a long way off form what i call cheap. Would be good to wait & watch & hope it corrects more.


(Billu) #7

Well after reading all the comments, I realize that people don’t realise what the product is like.

Its a tiller, as in “HAL” in hindi. It tills the land, as in dugs it up, its just ordinarily used tiller with wheels on one side and a little diesel engine to run it.

Now tractor also tills, but its a four wheeled vehicle. The mechanised tillers are cheaper, I checked one time, it costs something like 1,25,000 - 1,35,000 but the govt provides financing and interest subsidy. Hence the farmer has to pay only 13,500, rest in EMIs. Even at that low price, people can’t afford that much.

Keeping this in mind, when people mention tillers with north, I assume that they know nothing about agricultural practises. North is mainly kharif crop with paddy just know being grown in recent years as in 30 years. But in any case, north (and west) uses tractors and land parcels are quite huge compared to east.

Its the east (mainly bengal, bihar, orissa) that hasn’t taken to mechanised tillers, there are some usage of tillers in Jharkhand. Now tillers are best for paddy cultivation where plots are short and mud soaked soil limits the usage of tractors in fields which are farther from the road. Hence I’m invested for the time when these eastern states start using tillers due to NREGA.


(Yogendra) #8

How does the subsidy work? When one says a tiller is subsidized what does it mean to the company?

Is it the case that a bank (which is lending the money to farmer) makes 100% payment to the company and then get the subsidized amount from thegovernment? Or the company has to get the subsidized amount from the government?

If the company has to get the subsidized amount from the government, then how long does it take for the company to get the money? Also what percentage of the cost of tiller is subsidized?

Thanks in advance to helping me understand few basic things.

Regards,

Yogendra


(Hitesh Patel) #9

Subsidy is of Rs 30000 or 30% of cost whichever is lower.

NABARD is the nodal agency for the govt subsidy.

To the best of my knowledge, the company directly collects subsidy amount from the govt agency and hence the last quarter is the best quarter.


(Kiran) #10

Just a little note on the product mix and the utilization capacity.As on FY10, VST Tillers had an installed capacity to manufacture 13000 units of Tillers and Tractors, 3000 units of Diesel Engines, 21600 units 0fPrecision Components. However, the company had utilized 172%, 10%,55% of the installed capacity, respectively. Given that Tillers and Tractors contribute to 80% of VST’s revenues and they were operating way beyond capacity, the fixed cost per unit was very low, and hence better profits. There is no guarantee that they can continue to run way beyond capacity for multiple years (the machines will just die - as my friend would say) and hence keep a look out for reduction in margins (and hence profits).

A little insight into the tractor market. Maybe it’ll help in evaluating the revenue mix of VST.

The cutoff for tractors in terms of power is 20HP. A majority of tractors that are sold, especially for more than 3-4 acres of land is > 20 HP. I remember having read a CRISIL report which estimated that 80% of tractors sold are > 20HP. VST Tillers is trying to compete in this market, but given existing players strengths (esp. M&M), this is looking increasingly difficult.

Obviously, Power tillers, where VST has 60% market share, are not competing with tractors > 20HP.

However, the Power tillers are indeed in direct competition with tractors < 20HP. And here is the threat to VST Tillers. Although, VST tillers has a good presence in this <20HP market, M&M is ramping up their production in terms of <20HP tractors, a perfectly replaceable equipment for power tillers, and in fact, better coz it involves lesser effort to run it than the power tillers. Given M&M’s vast experience in tractors and its distribution market for the same, VST is looking at a pretty big threat coming its way.

One comfort factor though - the govt. has announced a subsidy only for power tillers and not yet for tractors <20HP. That should keep VST going for a while.

All in all, I am a little wary of the margin of safety at these prices. Very promising stock. Just that the price is a little off for me.


(Jarvis) #11

*Exactly there is scope for significant competition from existing players once this opportunity starts getting bigger. Also one should note the cash flows. There has been no increase in operating cash flows for the LAST 5 Years. If you ant increase cash flows in 5 years there is something easily suspect.

Though it must be said that the land bank is a safety valve.


(NJ) #12

@Aditya - There is no increase in free cash flow, however, if you look at operating cash flows they have become 6 times from FY07(46 cr in FY11 from 8 cr in Fy07). The free cash flows (until FY10) were subdued due to capex. This company is a pure play onlong term structural trend in mechanization of farm equipment, due to shortage of farm labor. The company’s share price was low 100’s in March 2007, clearly becoming 5 times in 5 years with profits increasing 4 times and revenue increasing by 3 times. Not sure, if you guys had a chance to look at the competition.

M&M - Even though the company has clear market share, it basically uses the Cash flow from the tractor business to fund everything else. The investments for M&M in its subs surpasses the capex for its tractor business. Clearly this industry has very high margins and is very lucrative, so TAFE (the second largest tractor manufacturer), does not even feel the need to be public.

There is a valid point raised on this forum about Chinese imports and how this company will maintain market share when biggies like M&M and Chinese imports are present in the market. I think where this boils down to is - how does the end consumer(farmer) make the decision to whether to buy a tiller or tractor, who else is involved in that decision process - govt, dealer, Self help Group? What is important for the farmer - price, availability of repairs, usage, govt subsidy?


(Hitesh Patel) #13

The management of VST Tillers seems upbeat about the prospects of the segment esp small tractors.

If the management walks the talk, then the company can have a turnover of 1000-1100 crores and if we consevatively apply a NPM of around 8-9% then also there could be net profits of close to 80-90 crores giving eps of around 100 per share. Even at 7-8 PE this could easily double from current levels of around 420-430 odd.

Here is a recentManagement speak on Hindu businessline.

With rising demand for tractors, VST Tillers Tractors Limited (VTTL) is setting up a second factory at Hosur in Tamil Nadu. The company is investing Rs.100 crore in the new facility that will produce 30,000 units of tractors per annum.

Arun Surendra, Managing Director, VST Motors, told_The Hindu_that the factory, being built on 14 acres would be completed by the end of 2012. VTTL’s existing Bangalore facility is producing to its full capacity of 10,000 units of tractors and 35,000 units of tillers annually. The company has shelved the earlier proposal to shift the entire tractor manufacturing base to Hosur from Bangalore. Mr. Surendra said that VTTL would continue with both the facilities for some time. The company aims to double its current turnover of Rs.550 crore by 2013. The group also has an NBFC (non-banking finance company), Gove Investments & Finance Limited, for funding its captive customers.

He said this business would see a growth in the coming years. At present, the company was providing 90 per cent of its finance to its Tamil Nadu customers and only 10 per cent to its Bangalore customers. This ratio would change in the next few years, he added. Mr. Surendra said VST was planning to scale up the NBFC business pan-India and start lending to other borrowers too.

The VST group, consisting of VTTL, VST Motors, India Garage and Gove Investments apart from a few other dealerships, had a turnover of Rs.3,000 crore last year.

The VST group is now celebrating 100{+t}{+h} anniversary of its founding. The group was founded by V. S. Thiruvengadaswamy in 1911 in Bangalore.

It subsequently expanded its operations to Chennai in 1942 with a dealership to distribute Austin and Studebaker cars. In 1954, VST Motors became a dealer for Tata Motors’ trucks and opened showrooms across Tamil Nadu.

Following the success in the trucks business, VST entered into an agreement with Mahindra & Mahindra to sell its products. In 1959, it opened India Garage to market Mahindra vehicles.

In recent times, the company has opened dealerships for leading car brands such as Ford, Volkswagen and Jaguar Land Rover. The group also has dealerships for leading two-wheeler brands such as Bajaj and Honda.


(Donald Francis) #14

Hitesh,

The company is becoming an interesting prospect with each correction. Its BS and healthy returns always shows up in most of our quality screens. And this Management Speak seems to be hinting at accelerating growth - that is a real potent picture, with valuations becoming attractive, I thought!

I haven’t studied VST in any detail, just what I have read from member posts. This is a Bangalore based company, we should have done this to death long back:) Some quick observations, and questions for those who track VST:

1). FY11 Sales 426 Cr. 1H 250 Cr. Article quotes current Turnover at 550 Cr.

It’s quite likely that the company will do upwards of 530 Cr in FY12?? or is this quoting Consolidated sales figures??

for those who actively track - Any seasonality between quarters of halves/ Which is the best Qr? Why? or sales are more or less evenly spread?

2). The company talks of doubling turnover of 550 Cr by 2013??

What are the contours of this kind of growth? 100% jump in 1 year??

on the back of expanded capacities? what’s current capacity, and once stabilised are we talking of double shifts or something?

Can the market absorb this? is there that kind of a latent demand, right now?

Else are we talking of any other subsidiaries growing very strongly. How much does the finance subsidiary contribute to consolidated sales.

3). Power Tillers and Sub 20 HP tractors

Which segment contributes what today? What is growing faster and what rates?

How strong is competition with M&M Yuvaraj in the 15 HP tractor category?

Viraj, Kiran - and others who track, please help answer and bring me up on the same page.

Cheers!

Donald


(Hitesh Patel) #15

Hi donald,

I have been tracking VST Tillers since a long time almost since july 09. I had put it up on TED when it was around 280 or so (pre bonus of 2 shares for 1 share held).

http://www.theequitydesk.com/forum/forum_posts.asp?TID=2227

It has been a very steady performer in terms of financials and stock price. From PE rating of around 5-6 times it went up with rerating to PE levels of around 10 times and sometimes more like 12 times when it posted all time high of 600 plus.

Coming to specific queries posted by you,

The growth driver going forward is going to be the small tractor business. Company already is a market leader in tillers and unless they penetrate other areas of India aggressively tillers will show steady growth. Demand for small tractors is huge.

Regarding competition with Mahindra, yes the small tractor of Mahindra is showing very strong growth and could be very strong competitor. But I think the market at present is so huge that it can easily accomodate competent players with good distribution and dealer network.

Regarding seasonality of business, since most of the subsidies are collected in the last quarter the March quarter is usually the best quarter. Hence second half is usually the better half in terms of sales and profits.

About doubling of sales from 550 crores levels, I think it would be in March 14 i.e FY 14. Because the Hosur facility which is going to produce small tractors is slated to start by end of FY 12. Add the usual delay of around 3-6 months and full effect will be seen by second half of fy 13 and best results will be visible by fy 14 i.e March 14.

Coming to projections for fy 12 I think it would be sedate with EPS of around 58-60 per share. So one can buy at a PE of around 7 times forward and sell in optimism above 10 times.

Balance sheet, return ratios, management integrity, etc are quite good.

Technically there seems to be strong support of around 400-410 levels for this stock which needs to be kept in mind. Any breach of this region could lead to some more downside.


(Kiran) #16

1) Both standalone and consolidated B/S & P/L are the same. As in, there is no subsidiary income that is quoted seperately and then merged into consolidated. (Atleast till the latest AR)

2) There is no mention of Gove Investment & Finance in the latest AR. I guess this is a part of the larger VST group, and no revenue from Gove investments would flow into VST Tillers and Tractors (VTTL).

3) There is a large untapped opportunity because of NREGA and other Govt. subsidiaries. Hence inspite of the agriculture sector growing at only 3-5%, the tiller & small tractor growth is nearing 20%.

4) Management does acknowledge threats from M&M and Chinese imports and is taking measures to strengthen their distribution network.

5) Numbers:

Categories FY 11 Sales Units FY 11 Revenue FY 11 Price per unit FY 10 Sales Units FY 10 Revenue FY 10 Utl.
Power Tillers 23449 266,93,78,705 Rs.113837 19068 212,00,44,749 Rs.111183
Tractors 4735 104,79,98,748 Rs.221330 3708 81,10,37,556 Rs.218726
Diesel Engines 337 136,69,510 Rs.40562 269 97,14,498 Rs.36113
Precision Components 74096 908,79,455 Rs. 1226 43418 636,47,214 Rs. 1465
Rice Transplanters 377 537,10,318 Rs.142467 858 12,65,74,991 Rs.147523
Categories Sales Unit increase% Revenue increase % Pricing increase%
Power Tillers 22.9% 25.9% 2.38%
Tractors 27.7% 29.2% 1.2%
Diesel Engines 25.3% 40.7% 12.3%
Precision components 70.7% 42.7% -16.3%
Rice Transplanters -56% -57.5% -3.4%
Categoies FY 11 Contribution to Overall Sales% FY 10 Contribution to Overall Sales%
Power Tillers 62.7% 61.5%
Tractors 24.6% 23.5%
Diesel Engines 3.2% 0.3%
Precision Components 2.1% 1.8%
Rice Transplanters 1.2%

As we can deduce from the numbers above, there is hardly any pricing power in the major revenue generators - Power Tillers and Tractors division. Almost the entire revenue increase has happened because VTTL sold more units. Given the state of their raw material (engines, steel, fuel cost etc), there is very little scope of expansion in margins (in fact, we can see margins coming down because of severe competition in the tractors category).

Another point to notice in the number vis-a-vis the MD&A of the AR, there has been a lot of stress in Rice Transplanters division although the numbers and the price speak for themselves. Acceptability seems to be an issue, but if Management continues to plough here without much traction, we might see a compression in the overall margins (although it contributes very little to the overall sales figure).

6) Now that we have deduced that there is little pricing power, and VTTL's growth will happen only through units increase, let's look at capacities.

Categories FY11 Capacity FY11 Production % Utilization FY 10 Capacity FY 10 Production % Utilization
Power Tillers 25000* 22706 91% 22000* 18617 85%
Tractors 5000* 4602 92% 4000* 3752 94%
Diesel# Engines 33000 27637 84% 29000 22663 78%
Precision# Components 216000 208140 96% 236000 119582 51%

*FY11 AR didn't break out the capacities for these two, but did give production numbers. I extrapolated (approx.) the recent interview numbers of 35000 Tillers and 10000 Tractors back to FY11 and FY10.

#Most of this stuff is for captive use

In the FY11 AR, the management had indicated that it would invest Rs. 66 cr in a factory to produce 30000 units of tractors. But in the recent article, they say they require 100 cr for this factory. Rs. 34 cr additional in about 6 months - maybe inflation is hitting them too :)

Anyway, let's estimate the approximate sales for the company this year, given the management says they are at 100% production capacity.

Let's look at the history of VTTL of production vs selling.

Categories FY 11 Production FY11 Sales FY11 % FY 10 Production FY10 Sales FY10 %
Power Tillers 22706 23449 103.3% 18617 19068 102.4%
Tractors 4602 4735 102.9% 3752 3708 98.8%
Diesel Engines 229 337 147% 294 269 91.5%
Precision Components 73979 73096 98.8% 40168 43418 108%

Sales can be greater than production because of inventory etc. But the takeaway is that almost all that is produced is being sold.

Management's interview says that their production capacity of 35000 tillers and 10000 tractors is producing at full capacity. Let's try to estimate revenue assuming we sell 100% of the stuff we produce (we can give a 5-10% discount later for inventory etc.)

Let's assume prices have been kept constant to FY11 numbers (reasonable assumption given the price increase last time was just 1-2%)

Categories Units sold Price per unit Total revenue
Power Tillers 35000 Rs. 113837 398,42,95,000
Tractors 10000 Rs. 221330 221,33,00,000
Diesel engines 400 Rs. 40562 1,62,24,800
Precision components 73000 Rs. 1226 8,94,98,000
Rice transplanters 300 Rs. 140000 4,20,00,000

Total Sales figure comes to Rs. 634 cr. Let's give a 10% discount for inventory holding etc., we arrive at a figure of Rs. 571 cr (that's a 34% growth!!).

Actual figure for H1 FY11 is 250 cr. So, we are saying that H2 FY11 will be 321 cr.

Assume a range of 8-11% net profit margin (which is basically an estimate of our margin of safety kinds), we arrive at a figure of Rs.45 cr - Rs.62 cr. On a base of 86,39,528 shares, the EPS works out to Rs. 52 - Rs. 71. Most probably, we are ending up at a EPS of Rs. 62 for this year.

If VTTL is able to achieve this growth of 34% (even at Management's figure of Rs. 550cr, the growth comes to about 29% growth), then the market should typically re-rate it. If it does, the current prices look fairly attractive.

6) Finally, the new facility is set up for 30000 tractors. However, it is unclear if the facility will be used to manufacture power tillers and tractors or just tractors (AR usually gives capacity numbers for Power Tillers and Tractors to-gether, and hence the doubt). I am not sure if they can double the turnover by FY14. The factory gets completed by end of 2012 (not FY12). Will they be able to sell 3 times the number of tractors in 1.5 years? Not too sure. However, even if they are able to utilize 50% of their capacity, we should be seeing an EPS north of 85-90 a year, which makes the current prices very attractive.

Risks:

Of course, the govt. might pull subsidies from under the carpet, and then we can all go home with empty pockets with this investment.

Views invited

P.S: Mannn..that was probably my longest post on Valuepickr ever!


(Kiran) #17

Oh, and a few more data points.

a) The annual market size of tillers is 53000 and growing at a rate of 15-20% y-o-y (VST’s market share seems to vary between 50-60%).

b) Last 5 years, sales growth is 27% CAGR, profits growth is 43% CAGR and the most important, dealer advance growth is 18% CAGR.

c) The scope for market penetration is pretty huge, as we might realise by now. Tractors seem to contribute to better margins than tillers. If VTTL can move the farmers with less than 2-5 acres of land from tillers to tractors (sub 20HP tractors, as discussed above), we might be on to a very undervalued stock. However, the downside of this is the subsidy for farmer is only for the tiller and not for the tractors. Govt. actions on this need to be watched out and if they extend the subsidy to tractors too, it would be a time to load up on this.


(Kiran) #18

And yes, they currently run double shifts already. Not too sure many companies can sustain a third shift too.

So, numbers for FY13 might be similar to FY12 - that’s a risk we have to take. I mean, given the lack of pricing power, the only way I see them moving their revenue figure is to change their product mix in selling more tractors than tillers.


(Kiran) #19

Hold the presses. A few more thoughts -

a) Just looked at the depreciation as a percentage of sales. It has steadily decreased from FY05 and in FY11, it was 3% of sales. Obviously, this was because of a lack of capex in the past 5-6 years. Correspondingly, NPMs have improved and thereby EPS. With the embarkment of 100 cr capex plant (I am not sure of different dep. rates for diff. parts of the plant), look out for the NPMs and hence EPS for FY13 (esp, when they can’t sell more without the new plant producing more units).

b) Sundry debtors is increasing (we can sum up Operating cash flows vs Net profit over the past 5 years too and somehow the figure is a little off). My guess is the subsidy money is not forthcoming totally from the Govt. (state govts. give this subsidy money to VTTL in the 4th quarter). With increasing deficits at both the State and the Central govt. level, the subsidy amount might not be forthcoming any easier than before. We need to watch out for this.

c) And nobody please talk about how there is some land in some bangalore for VTTL which somehow the Mgmt will monetize. I have till date not seen a mgmt selling land and rewarding shareholders with generous dividend. Anyway, the cue that they will not sell the land is that they have decided to take on debt (in addition to internal accruals) to set up the 100 cr capex plant.

I think I am done for now :slight_smile:

Views invited.


(OMPRAKASH) #20

Good analysis Kiran.Management is upbeat on prospects of 18.5 hp tractor and the reason for talking 1000 crfigure.I think tractor sales have been increasing because of price variation between conventional (4-5 L) and small (VST-2.25 Vs Yuvraj-1.8 lakh).Mahindra launched much smaller Yuvraj 15 Hp with price 1.8 L(10 Gm gold Offer).M&M has production capacity of 16000 units per year.So given the M&M distribution,finance,brand strength Vst has to sweat to reach that target.