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Buy VST Tillers Tractors Ltd For Target Rs.3,180

Ambitious growth journey lies ahead

About the stock: VST Tillers Tractors (VST) is the leading farm mechanisation player domestically with a dominant market share in the power tiller segment (~54% as of FY21) and prominent market share in the compact tractor space (~10%).

* FY21 segment mix –Power tiller ~50%, Tractors ~38%, Others ~12%

* FY21 Sales Volume – Power tiller: 27,318 units, Tractor: 8,835 units

Q1FY22 Results: The company reported robust Q1FY22 results.

* Power tiller sales volume for the quarter came in at 6,729 units (up 30% YoY) while tractor sales volumes were at 2,048 units (up 16% YoY)

* Sales for the quarter were at | 194 crore, up 32% YoY, nearly flat QoQ

* EBITDA for the quarter came in at | 25 crore with corresponding EBITDA margins at 13.1%, up 190 bps YoY

* Consequent PAT for Q1FY22 was at | 24 crore, up 40% YoY

What should investors do?

VST’s share price has grown at ~7% CAGR from ~| 1,900 levels as of September 2016 to ~| 2,650 levels prevailing now.

* We retain BUY rating amid healthy growth prospects over FY21-23E

Target Price and Valuation: We value the company at a revised target price of | 3,180 i.e. 25x P/E on FY23E EPS of | 127.3 (earlier target price | 2,475).

Key triggers for future price performance:

* Import restriction led volume growth in the power tiller segment with VST already on-boarding couple of domestic players for which VST intends to do contract manufacturing. We expect power tiller sales volume to grow at a CAGR of 19.6% in FY21-23E to 39,051 units in FY23E

* With introduction of high HP tractors, sales volume in tractor segment is expected to grow 12.6% CAGR over FY21-23E to 11,195 units in FY23E

* VST also intends to diversify its product basket and grow meaningfully in other segments like power reaper, precision components among others

* VST has set an ambitious target to be a | 3,000 crore global brand by 2025 in the farm mechanisation and solutions. Margin are seen in 12-14% range

* Capital efficient business model (RoIC ~20%) & debt free b/s

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