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Published on 2/04/2020 1:16:02 PM | Source: ICICI Direct

Hold VST Tillers Tractors Ltd For Target Rs. 660 - ICICI Direct

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Meaningful deterioration in return ratio profile…

VST Tiller & Tractors (VST) is a leading power tiller & lower hp tractor manufacturer domestically based out of South India. The company has been struggling in the recent past amid its ambitious spend on new product development and its quest to enter the higher hp tractor segment. The EBITDA margin profile has deteriorated quite significantly from being steady 15%+ till FY18 to 7.5% in FY19. With management guidance of muted margin profile to remain for a while, they are further expected to drop to 5.7% in FY20E. Building in positives, we expect EBITDA margins at 7.0%, 10.0% in FY21E, FY22E, respectively. VST has shut all its operations since March 26, 2020 till further notice from government authorities. We build in 40% volume decline for Q1FY21 assuming full lockdown in April 2020, partial lockdown in May 2020 and normalcy of operations resuming in June 2020. For full year, we build in total volume (power tiller + tractor) decline of 5% for FY21E and a rebound of volumes of 10% YoY growth in FY22E.

 

Sales volume to decline sharply, FY18 peak insurmountable

VST clocked power tiller sales volume of 30,143 units in FY18 post which it declined 25% YoY to 22,541 units in FY19. This is further expected to decline to 20,202 units in FY20E with FY22E volumes expected at 21,577 units. Thus, FY18 peak volumes look insurmountable with sales of power tiller highly dependent on state government subsidy regime. Even on the tractor front, VST clocked tractor sales volume of 11,367 units in FY18, post which it declined 28% YoY to 8,200 units in FY19 and further to 7,269 units in FY20E. We expect tractor sales volume at 7,627 units in FY22E.

 

Valuation & Outlook

The VST Tillers & Tractors stock witnessed a sharp re-rating tracking the weak P&L performance and consequent deterioration of return ratios in the recent past. Return ratios for VST have corrected from consistent 20%+ RoCE levels seen till FY18 to 11.5% in FY19. With limited margin improvement guidance, we foresee return ratios remaining below 10%, which is below our comfortable range. VST is a net cash positive company (cash & investments on books at ~ | 150 crore) but its incremental spend on new product development catering to the >15 hp crowded tractor space erodes our margin of safety on the stock. We assign a HOLD rating to VST, valuing the company at | 660 i.e. 12.5x P/E on FY22E numbers. We will wait for an improvement in financials before any meaningful change in our stance.

 


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