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VST Tillers Tractors Ltd (VSTT) reported flattish topline growth both on yoy and qoq basis at ?2.34 bn. This kind of a growth was reported on the back of weak retail sales in August and September since monsoon was severe than expected in some parts of the country. Recovery is seen in October though. Power tiller volumes were reported at 8,819 units, down by 3.7% qoq, while tractors sales were flattish at 1,688 units. The company was able to save well on commodity costs (70.2% of sales v/s 72.6% qoq) and other expenses which were 6.8% of sales v/s 12.3% qoq. Therefore EBITDA margins saw a huge jump at 13.8%, up by 660 bps qoq. These margins are well in the range of 13-14% guided by the management. In line with higher other income and operational excellence, net profits zoomed by 128% qoq to ?228 mn. However, we saw a steep increase in tax rate at 33% which should normalise going forward.

Power tiller business to witness strong growth in H2 and ensuing quarters

H1 witnessed subdued power tiller sales performance from VSTT. Going forward, with good monsoon in its main geographies of Gujarat and Maharashtra, recovery seen in October retail sales, higher level of water in the reservoirs, good Rabi season expectations and release of subsidies in Q4, we expect power tiller business of VSTT to report strong numbers in H2 and quarters thereby. VSTT being the market leader in the Power tiller segment (~54% market share) is expected to grow strongly at 15-20% in FY 23 and expected to maintain that rate further

Tractor segment to be aggressive on upcoming launches

VSTT has a 10% market share in the small segment of compact tractors. Tractor sales in Q2 were flattish qoq at 1,688 units. Going forward the company has planned for 4 higher HP launches (28HP, 36HP, 45HP and 49HP range) in the coming quarters. These will be accompanied by couple of high HP tractors in the 45HP and 49HP range by Zetor. Zetor range will be at quite a premium range s compared to VST range considering better technology and better features. All these shall target the northern region of the country. The Zetor range shall be unveiled in Chandigarh in November, but shall be launched in Q4. VSTT has intentionally increased its tractor inventory levels with its dealers to 30-40 days and that of tillers to 50-60 days (from 40-50 days normally) anticipating higher sales in H2. Management expects about 1500-2000 units alone from Zetor range of tractor to be sold in FY 24. They also estimate the compact tractor industry to remain flattish in FY23 and grow by lower to mid-single digit thereafte

Exports impacted by Europe, improvement expected going forward

VSTT witnessed slight weakness in exports business in August and September mainly driven by Europe, which the management expects to see recovery in Q3 with orders seen coming in October from there. Management also mentioned that the Zetor range of tractors will be launched in Africa in FY 24 which shall further add to the export tractor numbers. Additionally the company is also entering the US markets through launch of its Zetor range along with an electric tractor (Monarch brand). Additionally the company would also invest in the Power tiller business in the US soon. All these initiatives would surely lift up the exports performance in the coming quarters

Margin performance to increase from current range of 13-14%

Margins in Q2 were quite strong at 13.8%, 660 bps up qoq. They are expected to rise on the back of price hike of ?2000 taken on Power tiller in Q2. With a slew of big ticket products like the higher HP tractors, realisations and margins shall surely improve in the coming quarters. Now we expect the impact of input costs to be felt further in line with the current trend. Volumes should increase leading to higher operating leverage. We expect 13.4%/15% margins in FY 23E/ FY 24E respectively.

Outlook and Valuation

VSTT posted subdued topline numbers in H1 on weak volume performance. However, its profitability was good sequentially. The company is well-positioned to maintain its dominant market share in the power tiller market. Market share gains driven by new product launches across brands would increase the company’s addressable market. In addition, the company is strengthening its distribution network across the country. The company has technological tieups with Pubert (France) and Zetor (Czech Republic) for product development. VST Tillers has invested in California, US-based Zimeno Inc, a manufacturer of driver optional born electric tractors under the Monarch brand. It further intends to invest in its plants and products by outlaying a capex of ?500-600 mn in FY23 (out of which ?150 mn were incurred in H1). Power tiller volumes though portrayed a weak performance in Q2, are expected to bounce back with seasonally strong months, good monsoons in its main states, upcoming Rabi season and release of subsidies in Q4. Furthermore, its basic drivers like demand for small farm mechanisation, shortage of labour, subsidy for small farmers and increase in small farm lands under cultivation remain intact. VSTT’s leadership in compact tractors also offers it a strong position to develop further with partnerships like the one with Zetor for manufacturing higher HP tractors. The upcoming several launches would expand its presence in the North. Innovations in the other products like the power weeders (1800 units in H1) and brush cutters (800 units in H1) too should augur well for the company. Zero debt, high return ratios, improving capacity utilizations, improving margins all lend comfort to the investors. The stock is trading close to its historical average, at P/E multiple of 14x on its FY24E estimates. Therefore we believe the stock looks attractive from current levels with a target price of ?2,696. However, we have slightly pruned down our estimates on weak H1. Maintain BUY rating on the stock

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