Tilling To Thrive - VST Tillers Tractors

[INSERT_1]

The current economic scenario is such that even the big corporate are feeling the heat and have shown mixed bag performance in 9MFY09. But it is very comforting to see some of their smaller counterparts have not only withstood these tough times but also performed quite well.

VST Tillers Tractors (VST) is one such company that has maintained its consistently and hence we feel it merits a second look. VST Tillers Tractors (VST) is a Karnataka-based agricultural equipment manufacturer with factories in Hosur, Mysore and Bangalore. VST manufactures equipments such as power tillers, tractors, diesel engines and precision components. Power tiller (PT) is the main product of VST and manufactures around 18000 tillers per annum. Power tillers are basically a two wheeled version of a tractor, which are capable of performing farming operations right from ploughing, cultivation, sowing, pumping water, harvesting etc. PT is for farmers who have smaller land holding. VST management says that it commands 45 per cent market share with this segment contributing around 75 per cent to its turnover.

VST has also created a niche for itself in the smaller tractor segment, where it manufactures 18.5 horse power four wheel drive tractors. These tractors, which are 30 per cent smaller than normal tractors,  are often used in horticulture, vineyards etc. Though the company currently produces around 3000 tractors per annum, the management feels it is still not enough to satiate the existing demand. Hence, the company is now going for working in double shifts, which will help them in addressing this extra demand. With an additional attachment of a rotovator (revolving blades) fixed on these tractors, these tractors now find application in the rice fields as well, which has created a new market for these tractors. The company will now tap the rice belts in south. Currently the tractor segment contributes around 10 per cent to VST's revenues. The balance 15 per cent contribution comes from the precision components, which find applications in tractors, earthmoving equipments and gensets.

The reasons why we believe VST will do well is because it is well aware of its core competency and it sticks to it to drive its future growth. Secondly, it has created a niche for itself in compact farm equipments, which is in good demand from farmers with smaller land holding and looking for affordable farm equipments. [PAGE BREAK]

Thirdly the farmers gets subsidy ranging from 30-50 per cent for buying these farm equipment, which not only reduces overall cost for farmers due to mechanisation, but also creates additional demand for the company's products.

VST has been consistently performing both in the topline and the bottomline over the last seven years.Though the rising input cost did affect its operating margins in FY08, these margins have bounced back in 9MFY09. VST could post topline of around Rs 257 crore and PAT of around Rs 25 crore for FY09. At these estimates, VST gives an EPS of Rs 43.40, thereby resulting in to PE of just 3x, which we feel is very low. Besides, at market cap to sales of just 0.29x, we feel it is a good bargain at CMP of Rs 131 with one year price target of Rs 184.