VSt Tillers and Tractors limited

(narendra) #201

last five yr tiller and tractor number for VST. Management has guided for around 5% growth in tillers and 15% growth in tractors.
Volume growth may vary depending on monsoon,govt policy…etc.
Value growth depend on price,competitiveness,HP range.
In FY 17 value growth for tractor segment is 6%.Probably due to higher HP tractor (27 hp) launch.
During AGM, CEO mentioned that EBITA margins will remain around 16%.It may increase with increase in higher HP tractors which is expected in FY19.
ESCORTS ltd which has tractors ranging from <30 HP to >50 HP, has EBITA margins of around 10%in fy17.

(narendra) #202

Found this expert committee report on power tiller industry/current status/Chinese competition and recommendation to Govt .Anyone interested please go through this reportReport_of_the_Expert_Committee_on_Power_tillers_(Revised) (1) (1) (1).pdf (2.0 MB)

Few important points from above report:
1.86% of farm holdings are small and marginal.
2.Tiller industry remains underdeveloped currently developing 35k-40k units/yr.

3.Two Indian companies VST,BEGALURU and KAMCO ,KERALA caters to 68% of market share.(45% VST, 23% KAMCO).Remaining 30% is power tillers imported from China . Total capacity of Indian manufacture is 90k units/yr. They are unable to utilise full capacity due to Chinese competition.

4.Chinese tillers are 10-20% cheaper than domestic tillers hence the demand for imported tillers is growing. The market share of china tillers has grown significantly from a low of 10% few yrs back to 30% currently.

5.Subsidy was given to all power tillers ,i.e. whether imported or indigenous, provided these tillers are tested by testing institute and meets the minimum performance requirements. Many power tillers importers have not submitted samples for testing but still continue to be eligible for subsidy.
Chinese imported at cost of 65 to 75k, gets subsidy of around 60k but farmers are being charged at 1.25 to 1.5 lakh. ( 2 to 3 times import price.)
5.Many companies(Shrachi and Kranti) import power tillers from China .However they claim as manufacturers and quote their tillers as indigenous.
6.Imported tillers lacks in after sales service and concerns about availability of spare parts.
7.It is difficult to find out the performance difference between indigenous and imported tillers.

8.look at the table to know the price difference between domestic and Chinese players

1.Domestic tillers must b given preference over imported one
2.Increasing the customs duty up to 25% from current 7.5% on imported tillers.
3. Import quota for power tillers may be fixed as 10% of the total annual market of power tillers in India.
4.Making regulations and internal taxes less onerous to domestic manufacturers to boost make in India .Ways to incentivise the domestic industry through production subsidy/duty exemptions on assemblies and spare parts. Export related incentives for domestic manufacturers. Lower rate of interest(7%) and simplifying norms to extend institutional credit for purchase of tiller. Simplify procedure of subsidy distribution and timely release of subsidy.
5.Indian power tiller manufactures to be cost competitive with china, upgrading quality of tillers, expand dealers network and availability of spare parts.
6.Improve the quality of evaluation/testing of tillers by testing institute. Making more stringent norms for standard testing and for repeat/supplementary testing.

Discl: invested/accumulating.

(narendra) #203

VST has entered into technology transfer agreement with Korean company M/S Kukje machinery Co. Ltd for transfer of technology to manufacture higher Hp tractors in India.
0530c636-5015-4cf1-8415-a078c82647ea.pdf (252.6 KB)

(narendra) #204

Sept-17sales data for VST.

Tillers segment has shown good growth for the month. Difficult/wrong to assume the same for future considering various factors like subsidy which influence tillers sales.

Tractors growth story continues. Overall it was very good month for tractor industry with big brothers of VST recording good sales. Mahendra tarctors domestic sales increased by 52%, Escorts tractors domestic sale up by 34% for the month of Sept-17.


Why does VST trade at same PE as Mahindra despite much smaller size, lower growth and less dividend yield?

(Bheeshma Sanghani) #206

That is because it has a superior capital structure compared to mahindra which more than compensates for the benign growth rate.


Thanks. Can you please elaborate a bit on “a superior capital structure”. I am trying to research tractor companies .

(Kumar Saurabh) #208

Check Jana blog. On few posts he has discssed beautifully the importance on capital structure n ROCE. Also on VP check thread related to investments ,they are worth reading again n again. In case you are not aware of these terms, would suggest to read good investment finance books to start with. I learnt a lot from Pat Dorsey five rules of investment

(narendra) #209

Tractors have played major role in farm mechanisation over the years. With growing population ,decrease in percentage of population engaged in agriculture & increasing urbanisation it is important to increase the productivity/hectare by farm mechanisation to meet the ever increasing food demand in India. Govt has set seven year plan to increase farm power availability from current level of 2.02 Kw/ha to 2.8 Kw/ha by 2022 and to establish customer hiring centres in 2.80 lac villages and it has released substantial amount compared to previous years for this purpose.7 years Action Plan .pdf (996.2 KB)
fund rel.pdf (482.1 KB)

Indian tractor industry has grown gradually to reach nearly 6 lac tractor sales in fY 17. If we look at the past few years tractor industry sales has direct correlation with the southwest monsoon in India.
(source:aurum eq/Mahindra ar)

Monsoon during the year 2017 has been slightly below the normal (95% LPA) . Gujarat /Maharashtra and southern states have received normal/excess monsoon which are important markets for VST tractors.


VST has been focusing on growing tractor segment from last few years . Tractor revenue contribution has grown from low of 162Cr (30%)in FY12 to 271Cr (39%)in FY17. Compared to overall industry sales ,VST tractor sales is minimal ,which gives them large opportunity to grow.(table)

VST was selling low Hp tractors 18.5, 22, 17& 27 Hp(launched in fy16) mainly in the Guj and Maharastra where low HP tractors are preferred by cotton/sugar cane farmers due to small width of tractor. Once a dominant player in compact segment (<30 HP) VST has lost market share with competitors entering this segment over the years to current market share of 30% in compact segment. Tractor industry growth was mainly lead my higher HP tractors as evident in the below table.

source:eaurum eq.

I have interacted with few farmers and few points:
*most farmers prefers higher HP (35 to 45hp) tractors.
*low HP tractors mostly used to supply water.
*brand of tractor doesn’t matter much to them.
*most important is after sale service
*prefer to own tractor than hiring for rent.

VST has plans to enter higher HP tractor segment from FY19 for which it has recently entered into technology agreement with S.korean company . Selling higher HP tractor will increase the revenue/tractor and margins. Below Table gives rough idea about HP range and price of tractor.( it is not accurate data ,price may vary significantly base don certain models/specification…I have taken average based on availavble data)

Competition and capacity: there are more than ten players with excess capacity which makes tractor industry highly competitive which can put pressure on margins. It is difficult to get exact market share and capacity as many players are unlisted. Mahindra has 44% market share and its capacity may be in excess of 3 lac/yr considering they have sold around 2.5 lac tractors in fy17. TAFE which sell massey ferguson /eicher brand tractor has 25% market share with capacity of 3 lac/yr. ITL selling sonalika has 12% market share with 3 lac /yr capacity. Escorts another listed player has around 10% market share with ability to produce 1lac tractors/yr. Remaining players include HMT,JOHN DEERE,VST…etc.

(Sandip Parasnis) #210

Having worked in Tractor industry, my thoughts are as under.
Small tractor of VST is used mostly for inter-culture of Sugarcane & cotton in Maharashtra & Gujarat resp. However VST has big competition from Kubota who is market leader in this small segment. Every other competitor has identified this niche segment which has market size of around 40,000-45000 annual from 6 lac tractor industry. So every competitor has either collaborated with small tractor manufacturers ( Field Marshal with Mahindra with model Yuvraj, Tafe has collaborated with Captain) or bringing their own model as Sonalika has done. However Kubota has well identified customer needs in this segment & their both Models B 2420 & A211 are selling more.

I think VST is doing well from product point of view in Power tiller.

Tractor industry is divided in various market segment by HP of Tractor.

31 to 42 HP- 2 to 2.5 lac
42 to 50 HP- 2.5 to 3 lac
Above 50 HP- 50000 to 60000 nos.
Below 30 hp- 40000 to 45000 nos.

Buying decision of tractoris based on how much acre field farmer owns or to be cultivated, finance available, mileage & productivity of tractor, brand name & presence of strong dealer.

There is tough competition in tractor market. A small example is, John Deere even though number one in world, still has market share of 8.5% in India since year 2000.

31 to 42 HP segment has less margin & is volume game segment while as we go for higher HP, there is scope for higher margin. This make dealers to push for higher HP tractor in market.

Unfortunately VST has no higher HP model yet.

(narendra) #211

sales data for october.
Q2 results on 11/11/17.

(narendra) #212

Q2/H1 FY18 results

(narendra) #213

Q2FY18 concall notes:

  • Net revenue for Q2 is 175 cr which is growth of 4% YoY v/s 159 cr. Lower revenue growth is due to lower tillers sales and GST impact. Operating margins are low due to increase in employee cost/other selling expenses. Focus is to grow top line which may improve in H2. Selling expenses are likely to remain high with launch of new products. Margins likely to improve by 1% if the sales increases in H2FY18.

Tractors: Revenue from tractors is 89 cr in Q2.Sold 5,684 tractors in H2FY18 v/s 4656 in same period last year (3,159 tractors Q2 v/s 2,555 in q2 fy17). Growth of 22% compared to industry growth of 14% in compact segment. No of 27 hp tractors sold is 1,230 in H1FY18( 849 IN Q2FY18). Market share in compact segment is 15% against 14% last year.

  • Expect the tractor segment to continue good growth in H2FY8. Working on new product variants.

  • Tie up with Kukje Machinery ltd for higher HP Branson tractors. 47HP tractors will be launched in phased manner.
    Phase 1: will be marketing entirely imported unit . During this time vst will obtain necessary Govt approvals.
    Phase 2: components will be localized and sold in market by next year end. Investment of around 18 Cr for the same.
    Phase3: Fully indigenous one including engine will be manufactured.

  • Target to sell 11,000 to 12,000 tractors in Fy18.

Tillers: Revenue from tillers is 88 cr in Q2. Sold 5,888 tillers in Q2fy18 v/s 7,119 in Q2fy17. VST market share is 62% compared to 61% in fy17. VST had negative growth of 5% in 6 months against industry growth of -7%.

  • Lower tiller sales is due to unseasonal rains in Karnataka and delay in release subsidy in certain states. Ex. Andhra has launched DBT scheme. Orissa has increased no of permits for tillers. Better monsoon/rain during September will drive further tiller sales. Expecting better tiller sales in H2.

  • Overall tiller market to grow in single digits . 12 HP tillers contributes to 90% of tillers market.

  • Vst will be launching 15 HP tiller. Expected market size for the same is around 5,000/year.

  • Target to sell 27,000 tillers in fy18.

  • Not much changes in Chinese tillers growth. Kuboto has been gaining market share.

  • Working capital may slightly get better( by5days) by year end with release of subsidiary by states like Karnataka/Andhra and Orissa. Most of the price contract with Govt is for one or two years and will be revised accordingly.

(narendra) #214

From M&M Q2 concall about tractor industry outlook

(narendra) #215

Sales data shows excellent growth in tillers probably aided by good mansoon across southern states Govt subsidy/DBT also would have played key role. Central Govt making certain regulations like mandatory CMVR must have helped indirectly by reducing chinese import.
Tractor segment which has been focus area for company and expected to drive the revenue has degrown for the quarter. Other players like Mahendra /Escorts continue to show good growth in tractor sales.