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Equity Research Report: VST Tillers Tractors
Established in 1967, VTTL is one of the leading power tiller and compact tractor manufacturer in India. It was established by the VST Group of companies, a well-known century old business house in South India, as a JV with Mitsubishi Heavy Industries, Japan and Mysore State Industrial Investment Corporation. VTTL manufactures farm equipment, namely power tillers, tractors, power weeders, diesel engines and other precision agricultural and automotive components. It also trades in certain other farm equipment (mainly rice transplanters), which are
sourced from China.
In DII, Nippon Life India Trustee Ltd have increased their 5.4% to 5.58%.
In FY2021, VST’s revenue achieved a growth of 40.6% supported by strong demand growth under both tractors and tillers segment and a low base of FY2020, wherein Q4 FY2020 revenues were impacted by the pandemic. The growth in demand for tillers was also supported by restrictions placed on imports of tillers in July 2020. With continued healthy demand environment, the company’s top-line grew by 16.5% YoY in H1 FY2022 while its operating profit margin expanded to 14.9% in H1 FY2022 from 5.8% in FY2020 on the back of increased scale of operations and various cost optimization measures undertaken by the company. In 9M FY2022, the company’s sales volume of power tillers achieved growth of 13.3% Y-o-Y and going forward, the company is expected to achieve a healthy growth in FY2022 on the back of healthy demand for VST’s products while maintaining its operating margin at H1 FY2022 levels.
May 22, 2022: MASTER SUPPLY AGGREMENT WITH ZIMENO INC.
Company has entered into a Master Supply agreement with Zimeno Inc. DBA Monarch Tractor, USA. to supply integrated gear train along with front axle and rear axle assembly, for electric tractor of Zimeno Inc. DBA Monarch Tractor.
Agreement with the US-based company Zimeno
VTTL has entered into a master service agreement with Zimeno, to develop an integrated tractor powertrain for the electric tractor of Zimeno. Earlier in Mar’21 the company had invested Rs 11cr in Zimeno for 2% stake. In Nov’21 it has invested further Rs 10cr in Series B preferred stock of Zimeno to retain the same shareholding percentage in the company. The investment is intended for development and access to electric tractor technology. Zimeno Inc is an unlisted company incorporated in the USA involved in the development of electric autonomous tractor. The investment by VTTL will help accelerate Zimeno’s expansion and growth plans for the Indian and Asian market. VTTL has partnered with Zimeno to help accelerate the introduction of smart electric tractors in the Indian market.
The company is planning to nearly double its exports revenue from 5-6% now to 10% over the next three-four years, as it sees a large market opportunity for its compact tractors in Europe. Its shipments to Europe are growing and it expected exports of more than 1,200 tractors in FY22 to France, Germany, Spain, Portugal, Belgium, and the Netherlands. The company has entered into an agreement with ETG (Export Trading Group), for distribution of its tractors, power tillers, power reapers and diesel engines in the Southern African markets, including South Africa, Namibia, Botswana, Zimbabwe, Swaziland, and Zambia.
A steady movement toward greater horsepower tractors has occurred. VSTT has already established capacity for bigger tractors and intends to rapidly extend its position in northern markets. Its annual tractor capacity is around 36,000 units. It intends to meet its revenue target of Rs 1,000 crore in the tractor sector by 2025 with aggressive development into northern regions and a series of new product releases in the higher HP segment. Even in its compact division, VTTL has sold more 30HP tractors than 18HP tractors.
VTTL launched unique financing offer of up to 100 percent for its extensive line of brush cutters. Customers may purchase a brand-new brush cutter equipped with the latest technology adapted for Indian farms under this plan for as little as Rs. 1/- down payment. This product would solve the problem of labour availability.
The tractor industry volume growth has a high correlation with the deviation of monsoons from their long-term average. Any significant deviation (especially back-to-back in two years) resulting in weak monsoons could lead to a sharp decline in the industry's growth.
The farmers are dependent on government subsidy for power tillers and any delay in implementing schemes by various states could impact the company’s business. Most tiller sales are subsidy-driven with the subsidy at 40-50% of the cost of tillers. Farmers prefer to wait for new government permits which are available at different intervals which results in higher volatility in tiller sales volume. Also, lot of farmers are reluctant to go for outright purchase. Moreover, non-availability of retail finance may hamper the demand for power tillers. However, in the recent past, looking at the positive impact of mechanisation on farm output, some farmers are buying power tiller without waiting for the subsidy.
The tractor industry consists of many small and big players, thereby the company faces high competition in tractor industry. This may result in pressure on margin and profitability.
The government has imposed curbs on tiller imports by moving it to restricted items (requiring a license to import) from free. Reversal of this policy could impact market share of VTTL as Chinese imports are relatively cheaper.
VST derived 48.7% and 34.4% of its revenues from the power tiller and tractor segments, respectively, in H1 FY2022. The company’s revenues and earnings remain exposed to the cyclicality inherent in these industries owing to the dependence on monsoon and crop production in the country.
To a large extent, power tiller sales are driven by the state government subsidies, which exposes VST’s revenues and margins to any adverse changes in Government policies. The company has launched subsidy-neutral tiller and retail finance schemes for its power tillers which may mitigate the subsidy risk to a certain extent going forward. However, performance of the same will remain a monitorable.
The tractor and power tiller industries are characterised by intense competition, thus limiting VST’s pricing flexibility amid fluctuating input costs. With restriction in imports, the pricing scenario has been relatively better.
VST’s liquidity position is strong with a cash balance of Rs. 280.4 crore as on September 30, 2021 and a Rs. 5.0-crore buffer available as working capital facilities, which have largely remained unutilised. Despite regular dividend payouts, the company’s liquidity position has remained strong on the back of healthy operating cashflows, which are expected to continue in future as well. VST remains debt free and has moderate capex in the current fiscal.
a. New R&D Engine testing facility for Testing engines to Stage 5 Emission Standards with Base Emission setup is being established.
b. New PLM implementation in Design center has been completed this will enhance the capability of design of New variants of existing products as well as New Products.
c. FEA analysis and Adams (for load extraction with linkages) Introduced for validation of design before release.
d. Higher HP Tractor PTO Dynamometer installed. Which will support testing of the higher hp tractors for PTO and validation for certification.
The Companies expenditure on R&D during the year was H 22.26 Crores in FY20-21, as compared to H 6.99 CR in FY 19-20.
Rising farm income due to better output and higher MSP bodes well for demand for agricultural implements at a time when availability of labour is becoming scarcer. ICRA projects the tiller market to grow from Rs.1350 cr in FY21 to Rs.3150 cr in FY25. Better reservoir levels across the country and prediction for normal rains for the current year means better times for kharif and later rabi harvest. Apart from growth on tillers and tractors segments, it is also banking on expanding the volume and range of precision implements business over time.
I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Stocx Research Club). I have no business relationship with any company whose stock is mentioned in this article.
I am not a SEBI Registered individual/entity and the above research article is only for educational purpose and is never intended as trading/investment advice.
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