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Our Take:

VST Tillers Tractors Ltd. (VTTL) is the leading power tiller company in India with a market share of ~54%. Power tillers are affordable farm mechanisation equipment (with an average selling price of Rs 1.45 lakhs), highly preferred by small and marginal farmers. VST being a dominant player in the tillers space and has been in a sweet spot since Jul’20 when the Indian government imposed import restrictions on Chinese tillers which used to command ~30% of the market and accounted for 50% of units imported annually.

Restriction on cheaper Chinese imports provided level playing field for companies like VTTL. Also, the company has been expanding its product range and entering into strategic alliance with key players to expand its product portfolio and global reach. Govt. support in the form of subsidies under various schemes, increase in MSPs, easy finance options and normal monsoons augur well for the agricultural equipment market.

VTTL has expanded its dealer network in the domestic as well as overseas markets and has been entering newer territories. New product launches, import curbs on power tillers and strong focus on tractors segment is likely to drive the growth of the company. VTTL is debt-free company with healthy cash flows and low capex requirement in the near term. Over the medium term the company has set an ambitious target of being a Rs 3,000cr company by 2025 in diversified farm mechanization products and solutions.

It believes in leveraging electric, driver optional, and connected vehicle technologies to offer sustainable, productive, and profitable farming solutions and has made a strategic Investment in Monarch Tractor (Zimeno Inc) – Maker of the World’s First Fully Electric, Driver-Optional Smart Tractor. On May 17, 2021, we had initiated coverage on the stock with a recommendation to ‘Buy at LTP and add on dips to Rs 1,540-1,550 band’ for base case fair value of Rs 1895 and bull case fair value of Rs 2105 (Link). The stock had achieved our base case target on May 18 and bull case target on June 3, 2021.

Valuation & Recommendation:

We expect revenue/EBITDA/PAT of the company to grow at CAGR of 19/23/18% over FY21 to FY23E on the back of new product launches, increasing exports and continuing import curbs which could drive higher volumes. We expect RoE/RoCE to expand by 160/250bps to 16.2/21.9% in FY23E from FY21. We believe investors can buy the stock in the band of Rs 2550-2580 and add on dips to Rs 2250-2280 band (15.5x FY23E EPS) for a base case fair value of Rs 2859 (19.5x FY23E EPS) and bull case fair value of Rs 3079 (21x FY23E EPS) over the next 2 quarters.

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