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Wednesday, July 30, 2008

V.S.T. Tillers Tractors Ltd.-Investment Research Report

Report Date: July 29, 2008.
Company Name: V.S.T. Tillers Tractors Ltd.
Recommendation: BUY
CMP – Rs. 140
Target Price – Rs. 210/-
Mkt. Cap. Rs. 80.61 crore


Investment Rationale
Ø VST, Bangalore based farm equipment manufacturer of Power Tiller and low HP tractors, has come out withencouraging performance for Q1 FY09. Net Sales increased by 57.9% to Rs.59.40 crore. However, OPM% declined to 10.4% (11.5%). There was sharp rise in raw material cost to 70.3% (65.7%) of Net Sales, however operational efficiencies restricted fall in margins. Higher Sales aided by higher other income led to 63.8% spurt in PBT to Rs.6.37 crore and 54.6% rise in PAT to Rs.3.85 crore.

Ø Company has a technological tie-up with Mitsubishi Heavy Industries, which holds 3.78% stake in the country.

Ø VST is a leading player in the Power Tiller industry. The growth of tiller industry is dependant on availability of Government Subsidies and Bank Finance to small farmers. Due to overnment’s focus on agriculture, demand forpower tillers will be on a high. To tap lower-end tiller market and to accelerate sales, company has been importing Chinese Power Tillers in completely knocked down (CKD) form, assembling them and marketing under the brand name “ Dragon Shakti”. Along with this, company offers its own indigenously designed products with a longer
lifespan on the same platform.

Ø In Tractors, VST makes 18.5 HP tractors which are compact in size and cheaper than normal tractor. These tractors are also better than normal tractors and gives better results for farming. Company plans to aggressively market these tractors. Its Precision Components Division at Mysore produces the components, 40% of production is used for captive use in Power tillers and balance 60% is for catering to export market.

Ø Company has formed a JV with Mitsubishi, Japan to manufacture a range of multi diesel engines up to 50 HP for varied applications. VST will be holding 10% stake and balance 90% to be held by Mitsubishi. Technology and finance will be provided by Mitsubishi, Japan, while strategy and planning, marketing and day to day affairs will be handled by VST. Capex of Rs 41 Cr to be incurred for 30,000 units of small diesel engines plant at Mysore

Ø Market for power tillers and tractors is expected to grow steadily with Government’s focus on agriculture, easier and cheaper availability of credit, growth in organised retail in food products and revival of monsoon. Company is all set to exploit emerging opportunities and maintain its leadership position. Investments are being planned to upgrade technological capabilities and create additional capacity and attention is currently focused on strategies that would help further reinforce company’s market share by expanding dealer network.

Valuation
Ø At CMP, stock is trading 4 times FY 2009 expected EPS of Rs. 35 and 3.2 times FY 2010 expected EPS of Rs.43.

Hence, we recommend to “Buy” the share at CMP.
Source: Geojit Members Research Desk

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