VST Tillers - Our stand validated by Agricoop FY12 annual report; Buy - Anand Rathi

In its FY12 annual report, the Dept. of Agriculture & Cooperation Ministry (Agricoop) corroborated the positive trends we envisaged for VST Tillers (VSTT). We predicted better industry volumes and farm segmentation in our report, India Autos-Valuations no longer compelling , dated 8 April 2012. We maintain a Buy.

- Farm segmentation more glaring now. The report says that >50% of cultivated land is <4 hectares (~42% <2 hectares). Close to 83% of operational land holders are marginal/small farmers who own less than 2 hectares. This trend bodes well for VSTT.

- Quantum leap in volumes. Introduction/increased use of rice tranplanters/ tillers in Bihar, Assam, AP, Kerala, Manipur, Karnataka and Tamil Nadu has improved volumes in these states. Tiller industry volumes jumped 40.5% yoy during Apr-Dec - as per Agricoop report. VSTT dominates with improved yoy market share of ~45%. VSTT's Apr-Dec FY12 tractor volume growth has been a high 45.8% yoy.

- Rabi output may offset bleak Kharif produce. Good rains in Aug-Sep'12 will improve soil moisture and water availability. This augurs well for the ensuing Rabi crop, which may offset weak Kharif produce.

- Insurance an added advantage. As per the annual report, under National Agricultural Insurance Scheme, in spite of higher premium i.e. ~3% for Kharif vs. 2% for Rabi, in South India (where VSTT dominates) claims paid, sum insured and farmers benefited have jumped. This helps farmers to cover their losses, leaving them with more disposable income.

- Valuation. VSTT took price increase of ~3%, raising its 1QFY13 EBITDA margin by 123bps yoy to 16.3%. We maintain a Buy. It is trading at 5.2 FY14e EPS and 3.2x FY14 EV/EBITDA. Risks: High interest rates, commodity price rise, increased competition.

Source : Equity Bulls

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