I find VST Tillers as undervalued at these price levels (~Rs.412/-), considering the tailwinds. Wanted to check from senior investors if my thesis below is correct -
a) They would be starting manufacturing tractors starting Nov 2013 in the new facility. This should give a fillip to the earnings
b) M&M’s statement after Q1 FY14 results “The company increased its guidance for tractor volumes from over 6-8% to double digit volumes, while stating that higher growth rates of 15-17% were a possibility.”. Now, M&M primarily plays in > 20HP tractors. But I think tractors as such are seeing quite a good growth and < 20HP and 22HP tractors which VST specializes in, should also see a double digit growth
c) So, roughly according to my calculations, this is a 2x in 3 years kind of bet, with a reasonably high probability:
Rougly, say for FY15 (or middle of FY16),they sellTillers (30-33K) with 1.2L per tiller realizaton…around 400 cr sales
and Tractors, roughly 20-25K (too aggressive?)…with 2.5L per tractor realization…around 600 cr sales
So, 1000 cr sales in FY15 (or middle of FY16), with 9% net margin (conservative), will give us 90 cr profit…on a equity base of 0.86 cr, will give us a 104 EPS. A 10 P/E would give me a 2.5 bagger from here in 2-3 years or less (not considering the dividend yield)
d) Given that it’s an election year and subisidies have been announced by almost all state govts., and central govt. (very broad assumption that I am making, and for which I account below in a note) for the agriculture sector along with a fantastic monsoon, we should be expecting a a very good growth in tillers and tractors this year
e) At around 1000 rupees per share, it is around fairly valued and we can start selling (my optimism of course, knows no bounds)
f) Another kicker being - it is close to 500 cr market cap…once it crosses 500 cr, institutional investors might jump in…as there aren’t too many agri based players with a long track record and a dividend paying history
g) Last but not the least…Q2 2012 had a 6.5 cr profit. Since it’s been a great monsoon, there is little probability of slowdown in sales - and hence, even if we consider the same profit of 18 cr like 1st quarter (historically Q2 has been a good quarter except for the last year), the profit increase % would be very good.
I don’t want to make it more simpler than it is (and all businesses and quarters are not linear and subject to risks), but 18 cr quarterly profit, on an annualized basis is around 72 cr profit (not counting the operational efficiencies and the revised and better product mix due to more tractors). So, we are looking at about 70-80 bucks EPS this year. At 8 P/E, we are looking at a 35-50% appreciation from these levels.
The analysis seems simplistic - and if it is not, why hasn’t the market re-rated it already?
What is the insight that we have, that the market currently doesn’t? I am looking for information around subsidies and which states have given/declared it and which states haven’t? Karnataka had pulled out subsidies last time, have they re-instated it? Gujarat and Maharashtra are the biggest tractor markets for VST Tillers - any information on subsidies in those states?
Disc: Taken a starter position at current levels. Will build or cut the position depending on the information stream that comes through.