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Robust performance, positivity drivers intact…

VST Tillers & Tractors (VST) reported a robust performance in Q3FY21. Net sales for the quarter were at | 203 crore, up 65% YoY. Power tiller sales volume in Q3FY21 was at 6,734 units, up 80% YoY while tractor sales volume was at 2,436 units, up 36% YoY. EBITDA in Q3FY21 came in at | 30 crore with EBITDA margins at 14.7% and ensuing PAT at | 31 crore. Higher PAT in Q3FY21 was also supported by higher than anticipated other income.

Import restriction to boost power tiller volumes over

FY21E-23E Power tiller is essentially a farm mechanisation device used by small and marginal farmers with an average ASP of ~ | 1.25-1.5 lakh/unit. Amid conducive macroeconomic factors like higher share of small and marginal farmers domestically, robust farm cash flows, etc, the demand outlook for the power tiller segment is, however, dependent upon subsidy release by state governments. This has resulted in unpredictable volatility with industry volumes pegged in the range of ~40,000-60,000 units annually over the last few years. However, in the recent past, gauging the positive impact of mechanisation on farm output, more and more farmers (~30-40%) are buying power tiller without waiting for the subsidy. This marks a structural shift and is positive for the domestic industry. Moreover, with power tiller now placed in the import restriction category (since July 2020), demand prospects at domestic manufacturers is even more robust with VST being a key beneficiary by virtue of its >50% market share in the domestic power tiller market. VST has already finalised agreement for supplying power tillers to one of the domestic player (earlier importing) with annual volume contract pegged at ~2,000 units and is in final stages of negotiating a similar contract with another player (contract manufacturing). Hence, coupled with its subsidy neutral product offering, we expect VST to clock power tiller sales volume of ~31,400 units in FY22E & ~33,000 units in FY23E (~27,000 units in FY21E), implying a volume CAGR of 11% over FY21E-23E.

Strategic alliances at play to further leverage

VST brand With a prominent presence in the domestic farm mechanisation market, VST is now focusing upon strategic alliances to further leverage its brand and augment its product offering. To start with, it has entered into an alliance with Pubert India, for the distribution of power weeders. It has also signed an MoU with Zetor Tractors to jointly develop & produce, higher horsepower (hp) tractors for the Indian & overseas market. Recently, it also collaborated with Monarch Tractors in the domain of electric and smart tractors.

Valuation & Outlook

We are enthused by the underlying positive demand factors at VST and its ambitious vision to be a | 3,000 crore global brand by 2025 in diversified farm mechanisation products & solutions. We retain our BUY rating on the stock amid healthy B/S, CFO generation and resurgent return ratios matrix. We value VST at | 2,275 i.e. 18x P/E on FY23E (previous TP: | 1,980).

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