Way forward for Indian agriculture

Transcription

1 Sector Thematic Rating Matrix Company CMP ( ) Target ( ) Upside (%) Rating VST Tillers & Tractors 1,572 1, Buy Swaraj Engines Ltd 87 1,11 28 Buy Key Financials (VST) Crore FY14 FY15 FY16E FY17E Net Sales EBITDA Net Profit EPS ( ) Valuation summary (VST) FY14 FY15 FY16E FY17E P/E Target P/E EV / EBITDA P/BV RoNW RoCE Key Financials (SEL) Crore FY14 FY15 FY16E FY17E Net Sales EBITDA Net Profit EPS ( ) Valuation summary (SEL) FY14 FY15 FY16E FY17E P/E Target P/E EV / EBITDA P/BV RoNW RoCE Stock Data Stock Data VST SEL Market Capitalization Crore 18.5 Crore Total Debt (FY15) Crore Crore Cash and Investments (FY15) 14.2 Crore Crore EV 1254 Crore Crore 52 week H/L 1955 / / 742 Equity capital 8.6 Crore 12.4 Crore Face value 1 1 MF Holding (%) FII Holding (%) Comparative return matrix (%) Return % 1M 3M 6M 12M VST Tillers & Tractors (14.3) Swaraj Engines (.4) M&M Research Analyst Chirag J Shah shah.chirag@icicisecurities.com Shashank Kanodia shashank.kanodia@icicisecurities.com Way forward for Indian agriculture July 1, 215 Farm Mechanisation India commands ~2.4% of the global geographic area and has access to ~4% of the total water reserves for supporting a mammoth ~18% of the total global population and ~15% of the total global livestock. Thus, lack of natural resources like land & water and increasing infrastructural development limits the ability to increase cultivable land. Hence, this makes a compelling case for increasing crop yields domestically. Farm mechanisation i.e. usage of machinery and technology (e.g. tractors, tillers, transplanters, harvester, pumps, etc.) in farming is the most sought after solution for increasing farm yields given increasing concerns over pesticide residues in our food value chain & shortage of farm labour on account of a shift in labour from rural to urban and diversion of workforce in MGNREGA. Hence, with a positive view on the future of farm mechanisation domestically coupled with the central government s thrust on its increasing penetration, we initiate coverage on two foremost companies in this segment i.e. VST Tillers & Tractors (VST) and Swaraj Engines (SEL) with a BUY recommendation. The key risk to our call is adverse weather conditions (including below normal monsoons) and a delay in farm equipment subsidy release by various state governments. VST - leader in power tiller segment, tractor division at inflection point; recommend BUY, TP: 1845, valuing at 18x P/E on FY17E EPS of 12.5 VST is a farm equipment manufacturer. The company manufactures power tillers and tractors. For VST, sales volumes of power tillers have grown at 1.3% CAGR in FY7-15 to 2314 units in FY15 with average market share at 46% in the aforesaid period. The domestic power tiller industry is subsidy driven and dependent on collective planning and execution by state governments. Among power tillers, we expect sales to grow at a CAGR of 13.% in FY15-17E backed by volume CAGR of 15.9% (FY17E sales volume at 3146 units). On the tractor front, VST is a strong player in small agricultural tractors and manufactures tractors that are <3 hp. Sales volumes of tractors at VST have grown at a CAGR of 2.2% in FY7-15 to 6694 units in FY15. The management has put in place a new marketing team with focus on augmenting the penetration of its product in different geographies in FY16E-17E. In the tractor segment, we expect sales to grow at a CAGR of 14.3% in FY15-17E backed by volume CAGR of 17.3% (FY17E sales volume at 924 units). On a consolidated basis, we expect sales and PAT to grow at a CAGR of 13.7% and 12.9%, respectively, in FY15-17E. We have valued VST at 1845, i.e. 18x P/E on FY17E EPS of 12.5 and assigned a BUY rating to the stock. SEL; major supplier to Swaraj brand of tractors (M&M owned); recommend BUY, TP 111, valuing at 2x P/E on FY17E EPS of 55.5 SEL is a manufacturer of engines domestically for the Swaraj brand of tractors. The company caters to ~85% of engine requirement of Swaraj tractors (~15% supplied by Kirloskar Oil Engines) wherein it manufacturers engines catering to the 2-5 horse power (hp) tractors segment. With its fortunes directly linked to Swaraj tractors, which has a prominent market share (~14%) domestically, SEL is on a strong footing with increasing sales & profitability, going forward. We expect sales, PAT to grow at a CAGR of 12.7%, 15.4%, respectively, in FY15-17E. On the volume front, we expect engine sales to grow at a CAGR of 12.1% in FY15-17E to 8113 units in FY17E (64595 units in FY15). SEL has excellent return ratios with FY15 RoCE, RoE coming in at 29.%, 24.4% respectively. The company also maintains a healthy dividend payout with average payout in FY13-15 at 73% with current dividend yield at ~4% (dividend/share at 33 in FY15). We have valued SEL at 111, i.e. 2x P/E on FY17E EPS of 55.5 and assigned a BUY rating to the stock. ICICI Securities Ltd Retail Equity Research

2 Table of Contents 1. Farm Mechanisation a) Introduction b) Farm power & its sources in India c) Farm mechanisation: Penetration in India d) Tractors & tillers at the forefront e) Savings generated from farm mechanisation f) Main drivers g) Government support & thrust - SMAM h) Impediments i) Conclusion j) Monsoon 215 update 2. VST Tillers & Tractors a) Company Background b) Investment Arguments c) Financials d) Risk & Concerns e) Valuation f) Financial Statements 3. Swaraj Engines a) Company Background b) Investment Arguments c) Financials d) Risk & Concerns e) Valuation f) Financial Statements ICICI Securities Ltd Retail Equity Research Page 2

3 Farm mechanisation Introduction India commands ~2.4% of the global geographic area and has access to ~4% of the total water reserves to support a mammoth ~18% of the total global population and ~15% of the total global livestock. Thus, lack of natural resources like land & water and increasing infrastructural development limits the ability to increase cultivable land. Hence, this makes a compelling case for increasing crop yields domestically. Farm mechanisation i.e. usage of machinery and technology (e.g. tractors, tillers, transplanters, harvesters, pumps, etc.) in farming is the most sought after solution for increasing farm yields. This is given the increasing concerns over pesticide residues in our food value chain, shortage of farm labour on account of a shift in labour from rural to urban areas and diversion of workforce in MGNREGA. Exhibit 1: Mechanisation rate vs. Population engaged in agriculture (211) In China, the farm mechanisation rate is 38% while its share of the population engaged in agriculture is 65%. This implies a similar case to India wherein mechanisation rates are low and the percentage share of population engaged in agriculture is high % India US Western Europe Mechanization Rate Russia Brazil China % Population engaged in agriculture Source: Ministry of Agriculture, ICICIdirect.com Research Comparing India vis-à-vis its global competitors in the agri space, the level of mechanisation in India as of is ~4% while the share of the population engaged in agriculture is ~55%. The corresponding figures for developed countries like the US are 95% and 2.4%. For a developing country like Brazil the corresponding figures are 75% and 14.8%, depicting the high intensity of manual labour in India vis-à-vis its global competitors. Scope of farm mechanisation Farm mechanisation i.e. usage of technology and equipment in performing various tasks in the agricultural field has wide scope. It entails major agri tasks like seedbed preparation, sowing/planting, fertiliser application, irrigation and harvesting, among others. Specifically, in case of wheat and rice, mechanisation is also undertaken while harvesting the crop with penetration levels at ~6-7% domestically Exhibit 2: Scope of work in India (211) Agriculture Operation Penetration in India (%) Soil working & seed bed preparation 4 Seeding & Planting 29 Plant Protection 34 Irrigation 45 Harvesting & threshing 6-7 for wheat & rice; <5% for others Overall ~4-45% Source: Ministry of Agriculture, ICICIdirect.com Research In India, it has been observed that maximum mechanisation is undertaken while preparing the seed bed (penetration levels at ~4%) and irrigation (penetration levels ~45%) while the total mechanisation rate is ~4-45%. ICICI Securities Ltd Retail Equity Research Page 3

4 Major farm machinery used in India Major farm machinery used in India includes tractors, threshers and power tillers, among others. Among these, the biggest market in terms of annual sales is that of tractors (~6 lakh units annually), threshers (~1 lakh units annually) and power tillers (~56, units annually). Exhibit 3: Major farm machinery used in India Name of Machinery Market Size Annually (units) Per unit costs (US$/unit) Average per unit costs ( /unit) Annual Industry Size ( crore) Tractor Power Tiller Combine Harvester Thresher Rotavator Rice Transplanter Walking Type Riding Type Self-propelled reaper Zero till seed drill Multi -crop planter Laser land leveller Power Weeder Source: Trends of Agricultural Mechanisation in India CSAM Policy Brief, June 214, ICICIdirect.com Research USD:INR::1:6 The tractor market is by far the largest (both in volume and value terms). Among farm machinery, tractors are most widely used by domestic farmers with the total market size estimated at ~ 34, crore annually (~6 lakh units). Gross capital formation & institutional credit flow Gross capital formation (GCF), which represents the capex incurred on plants and machinery, is on the rise in the Indian agriculture sector with GCF as a percentage of GDP in agriculture and allied sector increasing from 14.6% in FY6 to 21.2% in FY13. Exhibit 4: Gross capital formation in agriculture, allied sectors Year GCF, Agriculture and Allied Sector ( cr) GDP, Agriculture and Allied Sector ( cr) GCF as a % of GDP (%) FY FY FY FY FY FY FY FY Source: Ministry of Agriculture, ICICIdirect.com Research Exhibit 5: Agriculture credit flow Year Agricultural Credit, Target ( cr) Agricultural Credit, Achieved ( cr) % Achieved YoY Growth (%) FY FY FY FY FY FY FY15 8 NA NA NA FY16E 85 NA NA NA Source: Ministry of Agriculture, ICICIdirect.com Research On the institutional credit front, the agriculture credit target set by the central government is also on the rise in India. Institutional credit has grown at 17.2% CAGR in FY9-16E, implying greater focus on flow of institutional credit to domestic farmers, thereby promoting greater usage of quality farm inputs for augmenting domestic crop yields. ICICI Securities Ltd Retail Equity Research Page 4

5 Farm power Tracking the level of farm mechanisation in India through the globally accepted Index of Agriculture Mechanisation i.e. power availability per unit area, it has been observed that mechanisation levels have improved in India over a period of time. The speed, however, has been a tad slow. Exhibit 6: Farm power availability in India (kw/ha) The total farm power availability in India in was at.3 kw/ha while the same in was at 1.8 kw/ha kw/ha Source: Ministry of Agriculture, ICICIdirect.com Research For calculating farm power availability, the following standards of power equivalent are followed; 1 human (agri worker) =.5 kw, draught animal pair =.38 kw, power tiller = 5.6 kw; tractor = 26.1 kw, electric motor = 3.7 kw, diesel engine = 5.6 kw All these power equivalent numbers (after multiplying with the respective available units) are finally divided by total sowable area to arrive at the farm power availability per source in kw/ha Kw/ha = (number of agricultural workers x.5+number of draught animal x.38 +number of tractors x number of power tillers x number of electric motors x number of diesel engines x 5.6) available cultivated land in hectare (ha) Sources of farm power in India In India, farm power i.e. mechanical power used in farms, is available through various sources that include agriculture workers, tractors, tillers and diesel engines, among others. Exhibit 7: Sources of farm power available in Indian agriculture (kw/ha) Year Agriculture Workers Draught Animals Tractors Power Tillers Diesel Engine Electric Motor Total Power Source: Trends of Agricultural Mechanisation in India CSAM Policy Brief, June 214, ICICIdirect.com Research Exhibit 8: Composition of farm power in India 1 % Agriculture Workers Draught Animals Tractors Power Tillers Diesel Engine Electric Motor Source: Trends of Agricultural Mechanisation in India CSAM Policy Brief, June 214, ICICIdirect.com Research Thus, it can been observed that slowly and steadily India has been progressing towards greater farm mechanisation with the share of agricultural workers in total farm power declining from 15.4% in to 5.1% in On the other hand, the share of tractors in total farm power has increased from 6.8% in to 45.8% in ICICI Securities Ltd Retail Equity Research Page 5

6 Farm mechanisation: Penetration in India Tractors, tillers at the forefront of mechanisation wave Tractors and power tillers have been at the forefront of driving the mechanisation wave in India. Tractor sales have grown at a CAGR of 9.% in FY5-15 to ~5.5 lakh tractors in FY15 (~2.3 lakh in FY5) while sales of power tillers have grown at a CAGR of 1.6% in FY5-15 to 48, power tillers in FY15 (17481 in FY5). Exhibit 9: Tractors & power tiller sales in India Year Tractors Sold (Nos) Power Tillers Sold (Nos) FY FY FY FY FY FY FY FY FY FY FY Source: Crisil, Ministry of Agriculture, ICICIdirect.com Research Penetration of tractors in India is higher in northern India, mainly Punjab and Haryana. On the other hand, the penetration of power tillers in India is higher in southern and eastern India. This is on account of the small size of land holdings per farmer in these respective regions. Exhibit 1: Farm mechanisation tilted towards northern states like Punjab & Haryana (211) Source: Ministry of Agriculture, ICICIdirect.com Research ICICI Securities Ltd Retail Equity Research Page 6

7 Savings from farm mechanisation Savings generated from farm mechanisation include savings of inputs viz. seeds (~15-2%), fertilisers (~15-2%), increase in cropping intensity (~5-2%), saving in time (~2-3%) and reduction in manual labour (~2-3%) with an overall increase in farm productivity at ~1-15%. Exhibit 11: Farm mechanisation (farm power) vs. domestic farm yield Kg/hectare Kw/ha Yield (LHS) Farm Power (RHS) Source: Ministry of Agriculture, ICICIdirect.com Research It has been observed that farm mechanisation is directly proportional to farm efficiencies and enhanced crop yields. On the yield front, average domestically food grain yield has increased from 522 kg/hectare in to 193 kg/hectare in primarily on the back of increasing penetration of irrigation facilities, hybrid seeds and farm mechanisation. Main drivers for increasing farm mechanisation domestically Increasing demand for foodgrains As per the Vision 23 document released by the Indian Council of Agricultural Research, domestic demand for foodgrains is expected to increase at ~2% CAGR in CY-3. Foodgrain demand is expected to reach 355 million tonne (MT) in CY3 vis-à-vis 192 MT in CY1. Fruits & vegetables demand is expected to reach 29 MT in CY3 vis-à-vis 136 MT in CY1. Exhibit 12: Foodgrains demand expected to increase at ~2% CAGR in CY-3 million tonne Pulses Cereals Wheat Rice CY2 Food Grains CY23 Fruits Vegetables Milk Source: Indian Council of Agricultural Research Vision 23, ICICIdirect.com Research India s domestic population has grown from 36.1 crore in to 121 crore in (at 2% CAGR). Going forward, as per the estimates of United Nations (UN), India s population is expected to grow at 1% CAGR to 145 crore by 228, giving rise to tremendous demand for foodgrains. However, given the limitations in land use and in increasing cropping intensity over a certain period, increasing the yield from the same land is an urgent necessity to meet the needs of a growing domestic population. ICICI Securities Ltd Retail Equity Research Page 7

8 Scope for yield improvement In India, crops yields have improved over a period of time. The yield of farmlands producing foodgrains has improved from 522 kg/hectare in to 193 kg/hectare in 21-11, representing a CAGR of ~2.2% in the aforesaid period. However, the progress of the same has been rather slow in the last decade. Hence, yields of foodgrains have increased from 1626 kg/hectare in 2-1 to 298 kg/hectare in , representing a CAGR of ~2% in the aforesaid period. Exhibit 13: Foodgrains: yield per hectare ( ) Exhibit 14: Foodgrains: yield per hectare (2-214) kg/hectare kg/hectare Source: Ministry of Agriculture, ICICIdirect.com Research Source: Ministry of Agriculture, ICICIdirect.com Research India s yield of food grains lags considerably vis-à-vis that of global peers Exhibit 15: Paddy, yield per hectare (212) Exhibit 16: Maize, yield per hectare (212) million World China India Indonesia Vietnam kg/hectare million World USA China Brazil India kg/hectare Area (million hectare) Yield (kg/hectare) Production (million tonne) Area (million hectare) Yield (kg/hectare) Production (million tonne) Source: Ministry of Agriculture, ICICIdirect.com Research Source: Ministry of Agriculture, ICICIdirect.com Research As is evident from the above charts, in case of paddy, domestic yields, as of 212, were at 3591kg/hectare vs. the global average of 4394 kg/hectare. Similarly, in case of maize, which is the most widely produced crop globally, India s yield is 2512 kg/hectare vs. the global average of 4944 kg/hectare. ICICI Securities Ltd Retail Equity Research Page 8

9 Modest hike in MSPs; farmers need to innovate in farm practices for better earnings In a recent meeting, the Cabinet Committee on Economic Affairs (CCEA) approved a modest hike in MSPs for domestic crops, thereby not paying heed to the popular demand for a steep hike in MSPs due to a distress in the rural economy. A modest hike in MSPs emphasises the government s stance on equitable growth domestically wherein factors of demand and supply as well global commodity prices were taken into consideration for fixing the MSP price. The MSP for rice (common grade) was increased by.5/kg (up 3.7%) to 14.1/kg in FY16 from 13.6/kg (FY15). The government, however, provided incentives to farmers growing pulses by declaring a bonus of /kg over and above the increase in MSP (India imports ~3 MT pulses annually, worth ~ 1, crore). Exhibit 17: MSP trend in India ( /kg) FY9 FY1 FY11 FY12 FY13 FY14 FY15 FY16 Kharif Crops YoY Growth (%) Common Paddy Grade A Maize Arhar Moong Urad Medium Staple Cotton Long Staple Rabi Crops Wheat NA NA Source: Government of India, Ministry of Agriculture, ICICIdirect.com Research Thus, a modest increase in MSP leaves little room for farmers to augment their annual farm income with the only option being to garner higher yields from their existing farmlands through innovative farm practices. This bodes well for all agri input companies in the agro-chemical, seed, fertiliser as well as farm mechanisation space. This may result in higher farm mechanisation, going forward. Shortage of farm labour The next main leg of growth in farm mechanisation will automatically come from the shortage of farm labour, wherein labour has started to get diverted to other means of livelihood, a shift in labour from rural to urban along with diversion of workforce on account of MGNREGA. Exhibit 18: Population dynamics of Indian workers Population dynamics of Indian agricultural workers (No. in million) S. No Particulars Country s population Total no. of workers No. of workers as % of population No. of agricultural workers Cultivators Agricultural labourers % of agricultural workers to total workers Source: *Vision 25 document of Central Institute of Agricultural Engineering, Bhopal, ICICIdirect.com Research It has been observed that the percentage of agricultural workers to total workers in India has been gradually declining from 59.1% in 1991 (total agricultural workers at million vs. total workers at million) to 54.6% in 211 (total agricultural workers at 263 million vs. total workers at million) and is expected to further decline to 25.7% by 25, thereby leading to severe shortage of farm labour and consequent switch to farm mechanisation with higher usage of farm machinery domestically. ICICI Securities Ltd Retail Equity Research Page 9

10 Exhibit 19: SMAM Mission components, government s assistance Government support: Sub-mission on agricultural mechanisation Realising the need to enhance farm mechanisation domestically, the central government under its flagship ministry i.e. Ministry of Agriculture has undertaken various steps to promote the usage of machinery by domestic farmers. The central government s efforts towards farm mechanisation have been aggregated under a formal programme viz. Sub-Mission on Agricultural Mechanisation (SMAM). It came into existence during the current five year plan (212-17) at an estimated outlay of ~ 2 crore (US$ 35 million) over the five year term. Share of Assistance S. No Mission Components Centre State 1 Promotion and Strengthening of Agricultural Mechanization through Training, Testing and Demonstration 1 Demonstration, Training and Distribution of Post Harvest Technology and Management 2 (PHTM): 1 Implementing Agency State identified institutions, ICAR institutions, PSUs of GOI, State Governments State identified institutions, ICAR institutions, PSUs of GOI, State Governments 3 Financial Assistance for Procurement of Agriculture Machinery and Equipment 5 5 State Governments 4 Establish Farm Machinery Banks for Custom Hiring 5 5 State Governments 5 Establish Hi-Tech, High Productive Equipment Hub for Custom Hiring 5 5 State Governments 6 Promotion of Farm Mechanization in Selected Villages 5 5 State Governments Financial Assistance for Promotion of Mechanized Operations/hectare Carried out 7 Through Custom Hiring Centers 5 5 State Governments 8 Promotion of Farm Machinery and Equipment in North-Eastern Region 5 5 State Governments of 8 North eastern States Source: Ministry of Agriculture, ICICIdirect.com Research SMAM is being mandated to improve farm power availability domestically, from a national average of 1.73 kw/ha (currently) to 2. kw/ha It has been observed that in case of tractors meant for agricultural purposes, the average subsidy (financial assistance) provided is 25% of the cost of tractor (maximum 1 lakh per beneficiary) while the same for SC, ST, small and marginal farmers, women and NE states beneficiary is 35% (maximum 1.25 lakh per beneficiary). The subsidy for power tillers is 4% (maximum.6 lakh per beneficiary) and 5% (maximum.75 lakh per beneficiary), respectively It lays emphasis on custom hiring services through the rural entrepreneurship model, thereby making an effort to reach out to small and marginal farmers. Exhibit 2: Financial assistance for procurement of farm machinery & equipment Pattern of Assistance (%) For General Farmers Max permissible subsidy per machine/equipment per beneficiary ( ) For SC, ST, Small & Marginal farmers, Women and NE States beneficiary Pattern of Assistance (%) Max permissible subsidy per machine/equipment per beneficiary ( ) Agriculture Machinery Tractors 1) 5-15 Hp lakh lakh 2) 15-2 Hp lakh lakh 3) 2-4 Hp lakh lakh 4) 4-7 Hp lakh lakh Power Tillers 1) <8 Hp 4.4 lakh 5.5 lakh 2) >8 Hp 4.6 lakh 5.75 lakh Self Propelled Rice Transplanter 4 rows 4.75 lakh 5.94 lakh 8 rows 4 2. lakh 4 2. lakh 16 rows 4 2. lakh 4 2. lakh Self Propelled Machinery Reaper cum Binder 4 1. lakh lakh Paddy Thresher.2 lakh.25 lakh Source: Ministry of Agriculture, ICICIdirect.com Research ICICI Securities Ltd Retail Equity Research Page 1

11 Impediments The main impediments for farm mechanisation in India are small and fragmented farm holdings, consequent high cost of farm equipment ownership and lack of credible financing options for domestic farmers. Small, fragmented farm holdings In India, the average size of operational holding has reduced from 1.33 hectare per holding in FY1 to 1.23 hectare per holding in FY6 and further to 1.15 hectare per holding in FY11. The proportion of marginal & small holding as a percentage of total holdings is also on the rise in India. It has increased from 81.8% in 2-1 to 85% in Exhibit 21: India - Farm holdings break-up No of Holding (million number) Category of Holdings Marginal (<1 hectare) Small (1-2 hectare) Semi-Medium (2-4 hectare) Medium (4-1 hectare) Large (>1 hectare) Area (million hectare) All Holdings g g (hectare/holding) p g holdings (%) Source: Ministry of Agriculture, ICICIdirect.com Research The overall land holding in India is fragmented. Also, a large proportion of this land holding is held by farmers in the small & marginal category. This had led to challenges in economies of scale of farm machinery. This acts as a deterrent to augmentation of farm mechanisation in India. It has been envisaged and implemented, to some extent, by authorities that the issue can be addressed through the concept of custom hiring or collective ownership of farm equipment. Conclusion Therefore, given the growing population domestically and change in population demographics, there is strong demand for foodgrains including cereals, fruits and vegetables, going forward. An increase in crop yields is the only solution to this problem since there is very limited opportunity to increase sowable farm land. Among methods of increasing farm productivity domestically, farm mechanisation is the most sought after solution. The others are increasing usage of agro-chemicals, correcting the composition of fertilisers (N:P:K ratio), increasing usage of hybrid seeds and better irrigation facilities. Farm mechanisation is also essential in augmenting the earning capacity of rural farmers and consequent progress of Indian society, as a whole. Growth in agri GDP is a prerequisite to achieve an overall national GDP growth target of 8% & above in the long term, going forward. Therefore, given the current emphasis of the central government on augmenting the share of manufacturing in total GDP and consequent shortage of farm labour, farm mechanisation is the way forward for Indian agriculture. The only perennial risk is adverse weather conditions. ICICI Securities Ltd Retail Equity Research Page 11

12 Monsoon Categorization (IMD) Monsoon Categorization Rainfall Range (% of LPA) Deficient <9 Below Normal 9-96 Normal Above Normal Excess >11 Monsoon; IMD sounds caution; initial signs encouraging The Indian Meteorological Department (IMD) has revised downward its rainfall forecast for the upcoming south west monsoon to 88% of the long period average (LPA) vs. the earlier forecast of 93% of LPA, primarily on the back of development of strong El Niño conditions. Private weather agency Skymet still maintains its forecast of normal monsoons at ~12% of LPA for the current upcoming season. Exhibit 22: India Chart - South west monsoon (June 1-July 8, 215) Source: IMD, ICICIdirect.com Research IMD defines a normal monsoon as a monsoon season wherein rainfall is in the range of 96-14% of its LPA with below normal monsoon being one where rainfall is in the range of 9-96% of its LPA However, domestically, sowing has been upbeat post the initial spell of rains with cumulative sowing at ~31 million hectares (MH) in June 1-July 3, 215 vs. 19 MH in the corresponding period last year. Sowing has been robust in pulses (up 133% YoY), oilseeds (up 44% YoY) and cotton (up 7% YoY) crops with special emphasis on pulses wherein the central government has announced a special bonus in terms of enhanced MSPs for growing pulses, which are largely imported for domestic consumption Source: Indian Meteorological department (IMD), ICICIdirect.com Research Domestically, cumulative rainfall during this current year monsoon has so far been 4% below the long period average (LPA). Rainfall activity was excess only over Northwest India. Exhibit 23: Monsoon summary (June 1-July 8, 215) Regions Actual Rainfall (mm) Normal Rainfall (mm) % Departure form LPA Country as a whole Northwest India Central India South Peninsula East & northeast India Source: Indian Meteorological department (IMD), ICICIdirect.com Research The initial start of the monsoon (at ~13%+ of LPA) after hitting the Indian shores (~June 5, 215) is quite encouraging for domestic farmers, with spatial distribution of rains at satisfactory levels. The further progress of monsoons in July and August, when a majority of the monsoon rainfall occurs, will need to be closely watched to gauge the impact of monsoons on the domestic agricultural sector. ICICI Securities Ltd Retail Equity Research Page 12

13 Rating Matrix Rating : Buy Target : 1845 Target Period : months Potential Upside : 17% YoY Growth (%) (YoY Growth) FY14 FY15 FY16E FY17E Net Sales 29.6 (11.9) EBITDA 64.8 (15.6) (4.1) 29.3 Net Profit 7.6 (16.2) (3.9) 32.7 EPS (Rs) 7.6 (16.2) (3.9) 32.7 Valuation Summary FY14 FY15 FY16E FY17E P/E Target P/E EV / EBITDA P/BV RoNW RoCE Stock Data Stock Data Market Capitalization Crore Total Debt (FY15) Crore Cash and Investments (FY15) 14.2 Crore EV 1254 Crore 52 week H/L 1955 / 118 Equity capital 8.6 Crore Face value 1 MF Holding (%) 9.6 FII Holding (%) 8.1 Price Performance Return % 1M 3M 6M 12M VST Tillers & Tractor (14.3) Mahindra & Mahindra Escorts 25.1 (3.6) HMT 2.4 (12.1) (33.2) (2.1) Price Movement 1, 9, 8, 7, 6, 5, 4, 3, 2, Jun-12 Jan-13 Research Analysts Aug-13 Price (R.H.S) Chirag J Shah shah.chirag@icicisecurities.com Apr-14 Shashank Kanodia shashank.kanodia@icicisecurities.com Nov-14 Nifty (L.H.S) 2,5 2, 1,5 1, 5 Jul-15 VST Tillers & Tractors (VSTTIL) Quality play in farm mechanisation VST Tillers & Tractors (VST) is a farm equipment manufacturer wherein it manufactures power tillers (capacity 6, units) and tractors (capacity 36, units) at its facilities in Bengaluru and Hosur, Tamil Nadu, respectively. The company is a leading power tiller player domestically with sales volumes growing at 1.3% CAGR in FY7-15 to 2314 units in FY15 with average market share at 46% in the aforesaid period. On the tractors front, VST is a strong player in small agricultural tractors and manufactures tractors that are <3 hp. Sales volumes of tractors for VST have grown at 2.2% CAGR in FY7-15 to 6694 units in FY15. The central government is focused on increasing farm mechanisation domestically while VST is focused on maintaining its market share among power tillers while at the same time increasing the market share in low hp tractors. Hence, we expect VST to clock sales and PAT CAGR of 13.7% and 12.9%, respectively, in FY15-17E. We have valued VST at 1845, i.e. 18x P/E on FY17E EPS of 12.5 and assigned a BUY rating to the stock. Power tiller segment - subsidy driven; mandate to maintain market share! The domestic power tiller industry is subsidy driven and dependent on collective planning and execution by state governments. The average subsidy that a farmer receives for a power tiller is in the range of 4,- 6, per unit, which costs ~ lakh, implying a subsidy support of ~3-4%. We believe the tiller division will continue to provide steady cushion to growth as VST s key prerogative is to maintain its market share in the range of 45-48%. Going forward, we expect sales in the power tiller segment to grow at 13.% CAGR in FY15-17E to 377 crore in FY17E ( 295 crore in FY15) backed by volume CAGR of 15.9% in FY15-17E to 3146 units in FY17E (2314 units in FY15). Tractor segment to be main growth driver, going forward! In the recent past (FY14), VST has shifted its tractor manufacturing facility to Hosur (Tamil Nadu) with an enhanced capacity to manufacture 36, tractors annually. The management has put in place a new marketing team with focus on augmenting penetration of its product in different geographies, viz. Bihar and South India. Going forward, on the back of enhanced capacity and renewed focus on the tractor business, we expect sales at the tractor segment to grow at 14.3% CAGR in FY15-17E to 23 crore in FY17E ( 176 crore in FY15). This will be backed by volume CAGR of 17.3% in FY15-17E to 924 units in FY17E (6694 units in FY15). Lean balance sheet, robust prospects, quality play! VST is a debt free company with cash & cash equivalents of 14 crore as of FY15. It also boasts of superior return ratios with five year (FY11-15) RoCE, RoE at 32%, 24%, respectively. VST is essentially a quality play and should be held in one s portfolio with long term investment horizon. Exhibit 24: Financial Performance (Year-end March) FY13 FY14 FY15 FY16E FY17E Net Sales ( crore) EBITDA ( crore) Net Profit ( crore) EPS ( ) P/E (x) Price / Book (x) EV/EBITDA (x) RoCE (%) RoE (%) ICICI Securities Ltd Retail Equity Research Page 13

14 Shareholding pattern (%) Q4FY15 Shareholder's Category Holding (%) Promoters 54. Institutional Investors 17.7 General Public 28.3 FII & DII holding trend (%) % Q1FY14 Q2FY14 Q3FY14 Q4FY14 Q1FY15 Q2FY15 FII & DII - Major Shareholders (%) Q4FY15 Q3FY15 Q4FY15 Shareholder's Category Holding (%) Pinebridge Investments Asia Ltd 2.9 Novastar International Fund 2.2 Goldman Sachs India Fund Ltd 1.9 ICICI Prudential Mutual Fund 1.3 Axis Mutual Fund 1.3 HDFC Mutual Fund 1.2 FII DII Company background VST Tillers & Tractors was founded in 1967 as a joint venture in technical collaboration between VST Motors and Mitsubishi Heavy Industries (Japan). Thereafter, over a course of time, VST acquired majority ownership in the company with current holding in excess of 51%. Mitsubishi was classified as the promoter group entity with 2.9% stake in the company. The company has inherited all technical know-how for efficient manufacturing and product development in power tillers & tractors and is a major player in the domestic farm equipment industry. VST has two manufacturing facilities. In Whitefield (Bengaluru), it manufactures power tillers (9 hp, 13 hp, 15 hp) and has a capacity of 6, units annually (in two shifts). In Hosur, Tamil Nadu, it has commenced (April 214) manufacturing agriculture tractors (18.5 hp, 22 hp) with a capacity of 36, units annually (in two shifts). For the new tractor facility in Hosur, VST incurred a capex of ~ 7 crore that was entirely funded from internal accruals. On the sales & marketing front, the company has a network of about 2 dealers & 3 vendors spread across India with most associated with VST for a fairly long time. VST is also present in the segment of rice transplanters & power reapers. The company imports the same from China and Japan and markets them in the domestic market, earning a trading margin on the same. VST also exports a few power tillers & tractors to Africa, Russia, Myanmar, etc. This is limited by high Chinese competition overseas. Exports in FY14 were at 15.4 crore i.e. ~2% of net sales of VST in FY14. Total net sales in FY15 were at 55.1 crore ( 623 crore in FY14). Exhibit 25: Sales segmentation (FY14) Net Sales 623 crore in FY14 Power Tillers 342 crore in FY14 (55%) Tractors 194 crore in FY14 (31%) Rice Transplanters 13 crore in FY14 (2%) Spares 42 crore in FY14 (7%) Others 31 crore in FY14 (5%) Sales Volume units; Realisation /unit Sales Volume 7452 units; Realisation 26682/unit Not manufactured; Traded goods Market Share 48.7% Total Market Size at 56 units Market Share 1.5% Total Segmental Sales 7811 units ICICI Securities Ltd Retail Equity Research Page 14

15 Exhibit 26: Product Profile Power Tillers It is a versatile machine that carries out all the function of a tractor except that the operator has to walk behind the machine. It is ideally suited for small farmers with wide applications ranging from wet puddling, dry land cultivation, ridging, water pumping and spraying Mitsubishi Shakti VWH 12 Power Tiller (Power 9 hp) VST Shakti 13 DI Power Tiller (13 hp) Dragon Shakti 15 DI Power Tiller (15 hp) Tractors State-of-the-art technology of Mitsubishi, very low weight and in-built rotary find exclusive application in wet puddling, inter cultivation, spraying for all crops and horticulture requiring less than 5 feet of row width planting VST Mitsubishi Shakti VT 224-1D (22 hp) Mitsubishi Shakti MT 18D Tractor (18.5 hp) VST Mitsubishi Shakti VT 224-1D AJAI-4WB (22 hp) Other farm equipments which are not manufactured but traded upon are: Rice Transplanter & Power Reaper VST is the pioneer in introduction and leader in mechanised rice transplanter. It deals with both eight row ridding and six row walk behind rice transplanter. VST, power reapers are mechanised units powered by a light weight diesel engine, which assists in harvesting rice, wheat, barley, etc. with rotating blades VST Yanji Shakti 8 Row Paddy Transplanter VST Shakti VS-4PR(n) Power Reaper ICICI Securities Ltd Retail Equity Research Page 15

16 The proportion of marginal & small holding as a percentage of total holdings is also on the rise in India. It has increased from 81.8% in 2-1 to 85% in Investment Argument Power tiller; set to be preferred choice of farm equipment In India, the average size of operational holding has reduced from 1.33 hectare per holding in FY1 to 1.23 hectare per holding in FY6 and further to 1.15 hectare per holding in FY11. Exhibit 27: India - Farm holdings break-up No of Holding (million number) Category of Holdings Marginal (<1 hectare) Small (1-2 hectare) Semi-Medium (2-4 hectare) Medium (4-1 hectare) Large (>1 hectare) Area (million hectare) All Holdings g g (hectare/holding) p g holdings (%) Source: Ministry of Agriculture, ICICIdirect.com Research Power tillers are also a cost effective source of farm power for small and marginal farmers wherein it is easy to recover the fixed costs and earn good margins from custom hiring services Domestically, power tillers are most suited for paddy (rice) cultivation Globally, power tillers were first introduced in ~192 s with Japan developing its indigenous design in ~1947 and was introduced in India in ~1963. Thus, fragmented land holdings belonging to a lot of farmers in the small & marginal category led to challenges over collective ownership of tractors that cost in the range of ~ lakh/unit. This, in turn, throws up a huge opportunity for the domestic power tiller sector wherein a power tiller costs ~ 1.25 lakh/unit but suffices or is able to perform all requisite agricultural operations performed by a tractor. We believe that, going forward, given the government s thrust on increasing farm productivity through greater penetration of farm mechanisation and its support through various subsidy programmes, power tillers may turn out to be the preferred farm equipment by choice for domestic farmers. Some basic differences between a power tiller and a tractor are mentioned below. On the operational front, both tractors as well as power tillers can perform all agricultural operations viz. soil preparation, tilling, ploughing, cultivating, etc. Both can also be used in transportation, pumping water, spraying, etc. The power applied, however, is lower in case of a power tiller vis-à-vis a tractor. Exhibit 28: Difference between tractor and power tiller Difference Between a Tractor & Power Tiller Characteristics Tractor Power Tiller Essential function Pulling/ Hauling and agriculture Agriculture Seat Yes No Output High (~>=15 hp) Less vs. tractor (<15 hp) Controlled by (Drive) 4 wheels 2 wheels Excise Duty Exempt Exempt Steering Has conventional steering No conventional steering Hydraulic Power for Lifting Yes No Self Starting function Yes No Motor Vehicles Act Applicable Not Applicable Registration & Driving License Required Not Required Maximum Speed 4-5 kmph 15 kmph Engine Multi-cylinder Vertical engines Single Cylinder, horizontal engines Source: Indiankanoon.org, ICICIdirect.com Research In the power tiller segment, domestically, since VST is the marker leader (market share in excess of 45%), the company is on a strong footing and is poised to gain, going forward. ICICI Securities Ltd Retail Equity Research Page 16

17 Exhibit 29: VST power tiller sales (value) Power tillers - base business; VST: segmental leader domestically! Power tillers have been the base business for VST with sales in the segment growing at a CAGR of 14.5% in FY7-15. In FY15, VST s sales in the power tiller segment came in at 295 crore, recording de-growth of 14%, primarily on the back of deficient and unseasonal rains in the last two cropping seasons that impacted the purchasing power of domestic farmers. In FY13, the performance of the power tiller segment was muted on account of supply side issues wherein the company was unable to procure its raw material due to a ramp down at its vendors. Exhibit 3: VST power tiller sales (volume & realisation) crore units /unit FY7 FY8 FY9 FY1 FY11 FY12 FY13 FY14 FY15 FY7 FY8 FY9 FY1 FY11 FY12 FY13 FY14 FY15 On the volumes front, VST s power tiller sales have grown at a CAGR of 1.3% in FY7-15 to 2314 units in FY15 (151 units in FY7). On the realisation front, realisations have grown at a CAGR of 3.8% in FY7-15 to /unit in FY15 ( 949/unit in FY7). VST has always maintained its market leadership in the power tiller segment domestically with market share in the range of 42-48% in FY7-15. The other major players are Kerala Agro Machinery (with a market share of ~25%) and Chinese players (with a market share of ~25-3%). Exhibit 31: Domestic power tillers industry volume number of units FY7 FY8 FY9 FY1 FY11 FY12 FY13 FY14 FY % Total Industry Sales VST Sales Market Share Source: Ministry of Agriculture, Company, ICICIdirect.com Research Power tiller sales volumes at VST have grown at a CAGR of 1.3% in FY7-15 vs. the industry growth rate of 8.6% in FY7-15, implying a gain in market share by VST. Total industry sales for power tillers domestically were at ~48 units in FY15 vs units in FY7. ICICI Securities Ltd Retail Equity Research Page 17

18 Exhibit 32: Power tiller volume growth rate (industry vs. VST) Historically, it has been observed that VST has always grown ahead of its industry growth rate with average YoY growth rate of the industry in FY8-15 at 1.6% while the same for VST in the aforesaid period was at 12.%. FY11 and FY15 were exceptional years wherein the volume growth rate at VST was lower than the industry growth rate % FY8 FY9 FY1 FY11 FY12 FY13 FY14 FY Industry Sales Growth YoY VST Sales Growth YoY Source: Ministry of Agriculture, Company, ICICIdirect.com Research The domestic power tiller industry is subsidy driven and dependent on collective planning and execution by state governments. The average subsidy received by a farmer for a power tiller is in the range of 4,- 6, per unit, which costs ~ lakh, implying subsidy support of ~3-4%. VST has, over a period of time, developed expertise to deal with government agencies (subsidy mechanisms). The company has been able to command a healthy market share and at the same time improved its operating margins. Exhibit 33: VST power tiller sales (value) We expect the current trend to continue, going forward, with VST maintaining its dominant market share in the domestic power tiller segment primarily on the back of good quality of its product and strong brand recall. VST s key prerogative is to maintain its market share in the range of 45-48%. Exhibit 34: VST power tiller sales (volume & realisation) crore no of units / unit 5 FY13 FY14 FY15 FY16E FY17E FY13 FY14 FY15 FY16E FY17E Sales Volume Realization Going forward, we expect sales of the power tiller segment to grow at a CAGR of 13.% in FY15-17E to 377 crore in FY17E ( 295 crore in FY15). Sales volumes are expected to grow at a CAGR of 15.9% in FY15-17E to 3146 units in FY17E. Realisations are expected to decline at a CAGR of 2.5% in FY15-17E. This is primarily on the back of softer saw material prices (mainly steel). Realisations are expected to reduce from /unit tin FY15 o /unit in FY17E. ICICI Securities Ltd Retail Equity Research Page 18

19 Exhibit 35: VST tractor sales (value) Tractor business; renewed focus to drive sales VST is also present in the tractor segment wherein the company manufacturers low hp (18.5 hp & 22 hp) tractors that are meant primarily for agricultural purposes. Sales in this segment have grown at a CAGR of 24.6% in FY7-15 to 176 crore in FY15 ( 3 crore in FY7). In FY15, VST recorded de-growth of 9% in tractor segment sales. This was primarily on the back of deficient and unseasonal rains in the last two cropping seasons that impacted the purchasing power of domestic farmers. Exhibit 36: VST tractor sales (volume & realisation) crore FY7 FY8 FY9 FY1 FY11 FY12 FY13 FY14 FY15 units FY7 FY8 FY9 FY1 FY11 FY12 FY13 FY14 FY /unit Exhibit 37: Domestic tractor market share players (<=3 hp segment) On the volume front, VST s tractor sales have grown at a CAGR of 2.2% in FY7-15 to 6694 units in FY15 (1537 units in FY7). On the realisation front, realisations have grown at a CAGR of 3.7% in FY7-15 to /unit in FY15 ( /unit in FY7). Market share in <3 hp segment; slowly inching upward VST is a prominent player in the low hp (<3 hp) tractor segment domestically with its market share increasing from a mere 2.7% in FY7 to 11.2% in FY15. These low hp tractors are meant primarily for agricultural operations and are not meant for any commercial activities like transportation of goods & personnel, etc. The major player in this segment is M&M with a market share of over 5% FY7 FY8 FY9 FY1 FY11 FY12 FY13 FY14 FY15 Source: Crisil, Company, ICICIdirect.com Research Escorts Force Motors International Tractors Ltd Mahindra & Mahindra Ltd TAFE VST ICICI Securities Ltd Retail Equity Research Page 19