Way forward for Indian agriculture

Sector Thematic Rating Matrix Company CMP ( ) Target ( ) Upside (%) Rating VST Tillers & Tractors 1,572 1,845 17 Buy Swaraj Engines Ltd 87 1,11 28 Buy Key Financials (VST) Crore FY14 FY15 FY16E FY17E Net Sales 624 55.1 583.2 71.8 EBITDA 118.9 1.3 96.2 124.4 Net Profit 82.9 69.5 66.8 88.6 EPS ( ) 95.9 8.4 77.3 12.5 Valuation summary (VST) FY14 FY15 FY16E FY17E P/E 16.4 19.6 2.3 15.3 Target P/E 19.2 22.9 23.9 18. EV / EBITDA 1.4 12.5 12.3 9.1 P/BV 4.4 3.7 3.2 2.8 RoNW 26.5 19.1 16. 18.2 RoCE 36.8 25. 2.5 23.3 Key Financials (SEL) Crore FY14 FY15 FY16E FY17E Net Sales 68.3 539.7 564.9 685.6 EBITDA 9.6 74.7 82.2 13.1 Net Profit 67. 51.8 56.1 68.9 EPS ( ) 53.9 41.7 45.2 55.5 Valuation summary (SEL) FY14 FY15 FY16E FY17E P/E 16.1 2.9 19.3 15.7 Target P/E 2.6 26.6 24.6 2. EV / EBITDA 1. 12. 11. 8.6 P/BV 5.1 5.1 5. 4.7 RoNW 31.9 24.4 25.8 3.2 RoCE 38.8 29. 31.5 38.6 Stock Data Stock Data VST SEL Market Capitalization 1358.2 Crore 18.5 Crore Total Debt (FY15) Crore Crore Cash and Investments (FY15) 14.2 Crore 181.9 Crore EV 1254 Crore 898.6 Crore 52 week H/L 1955 / 118 173 / 742 Equity capital 8.6 Crore 12.4 Crore Face value 1 1 MF Holding (%) 9.6 9.2 FII Holding (%) 8.1 6.8 Comparative return matrix (%) Return % 1M 3M 6M 12M VST Tillers & Tractors 9.8 2.6 12. (14.3) Swaraj Engines 18.3 7.3 4.8 (.4) M&M 6.1.9 3.6 5.6 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

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

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) 1 95 95 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 % 8 6 4 2 4 55 2.4 3.9 8 75 65 38 14.4 14.8 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 21-11 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

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 6 7-12 57 342 Power Tiller 56 21 126 76 Combine Harvester 4-5 22-35 171 77 Thresher 1 16-25 123 123 Rotavator 6-8 13-2 99 693 Rice Transplanter 15-16 62 Walking Type 25-42 21 Riding Type 33-166 597 Self-propelled reaper 4-5 13-2 99 45 Zero till seed drill 25-3 75-85 48 132 Multi -crop planter 1-2 85-1 555 8 Laser land leveller 3-4 58-65 369 129 Power Weeder 25 85 51 1275 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 (%) FY6 8664 594487 14.6 FY7 9257 61919 14.9 FY8 15741 6558 16.1 FY9 127127 655689 19.4 FY1 133162 66987 2.1 FY11 132734 717814 18.5 FY12 157172 753832 2.8 FY13 16284 76451 21.2 Source: Ministry of Agriculture, ICICIdirect.com Research Exhibit 5: Agriculture credit flow Year Agricultural Credit, Target ( cr) Agricultural Credit, Achieved ( cr) % Achieved YoY Growth (%) FY9 28 287149 13 FY1 325 384514 118 33.9 FY11 375 468291 125 21.8 FY12 475 51129 18 9.1 FY13 575 67375 16 18.9 FY14 7 73765 14 2.3 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

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 1971-72 was at.3 kw/ha while the same in 212-13 was at 1.8 kw/ha 2. 1.5 1.4 1.7 1.8 kw/ha 1..5.3.3.4.6.9. 195-51 196-61 197-71 198-81 199-91 2-1 21-11 212-13 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 26.1+ number of power tillers x 5.6 + number of electric motors x 3.7 + 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 1971-72.45.133.2.1.53.41.293 1975-76.48.135.4.1.78.56.358 1981-82.51.128.9.2.112.84.467 1985-86.57.129.14.2.139.111.578 1991-92.65.126.23.3.177.159.76 1995-96.71.124.32.4.23.196.918 21-2.79.122.48.6.238.25 1.175 25-6.87.12.7.9.273.311 1.5 211-12.1.119.84.14.295.366 1.698 212-13.93.94.844.15.3.494 1.841 Source: Trends of Agricultural Mechanisation in India CSAM Policy Brief, June 214, ICICIdirect.com Research Exhibit 8: Composition of farm power in India 1 % 8 6 4 2 14. 15.6 18. 19.2 2.9 21.4 21.3 2.7 21.6 26.8 18.1 21.8 24. 24. 6.8 23.3 22.1 2.3 18.2 17.4 16.3 11.2 19.3 24.2 45.4 3.3 34.9 4.9 46.7 47.3 37.7 45.8 27.4 22.3 16.6 13.5 1.4 15.4 13.4 8. 7. 1.9 9.9 8.6 5.1 7.7 6.7 5.8 5.9 5.1 1971-72 1975-76 1981-82 1985-86 1991-92 1995-96 21-2 25-6 211-12 212-13 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 1971-72 to 5.1% in 212-13. On the other hand, the share of tractors in total farm power has increased from 6.8% in 1971-72 to 45.8% in 212-13. ICICI Securities Ltd Retail Equity Research Page 5

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) FY5 23296 17481 FY6 26479 2233 FY7 313941 24791 FY8 32948 26135 FY9 34622 35294 FY1 42586 38794 FY11 482286 551 FY12 536891 6 FY13 527768 47 FY14 634151 56 FY15 551463 48 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

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 25 2 15 1 5 193 1626 1.7 138 1.4 123 872 71 522.9.6.3.3.4 195-51 196-61 197-71 198-81 199-91 2-1 21-11 1.8 1.6 1.4 1.2 1.8.6.4.2 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 195-51 to 193 kg/hectare in 21-11 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 4 35 3 25 2 15 1 5 14 3 156 12 95 64 81 33 192 355 43 11 18 182 93 76 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 195-51 to 121 crore in 21-11 (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

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 195-51 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 213-14, representing a CAGR of ~2% in the aforesaid period. Exhibit 13: Foodgrains: yield per hectare (195-211) Exhibit 14: Foodgrains: yield per hectare (2-214) kg/hectare 25 2 15 1 5 522 71 872 123 138 1626 193 kg/hectare 25 2 15 1 5 1626 1535 1652 1757 199 193 2128 298 195-51 196-61 197-71 198-81 199-91 2-1 21-11 2-1 21-2 22-3 23-4 24-5 25-6 26-7 27-8 28-9 29-1 21-11 211-12 212-13 213-14 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 8 7 6 5 4 3 2 1 718 6735 5639 5153 4394 3591 164 26 153 31 43 69 13 8 44 World China India Indonesia Vietnam 8 7 6 5 4 3 2 1 kg/hectare million 1 8 6 4 2 875 7734 5949 4944 521 274 177 28 2512 35 35 71 14 8 21 World USA China Brazil India 9 8 7 6 5 4 3 2 1 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

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 2.5-2.7/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 9. 1. 1. 1.8 12.5 13.1 13.6 14.1 3.7 Paddy Grade A 9.3 1.3 1.3 11.1 12.8 13.5 14. 14.5 3.6 Maize 8.4 8.4 8.8 9.8 11.8 13.1 13.1 13.3 1.1 Arhar 2 23 3 32 38.5 43. 43.5 46.3 6.3 Moong 25.2 27.6 31.7 35 44 45. 46. 48.5 5.4 Urad 25.2 25.2 29 33 43 43. 43.5 46.3 6.3 Medium Staple 25 25 25 28 36 37. 37.5 38. 1.3 Cotton Long Staple 3 3 3 33 39 4. 4.5 41. 1.2 Rabi Crops Wheat 1.8 11 11.7 12.85 13.5 14 14.5 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 1991 21 211 22 25 1 Country s population 846.4 128.7 121.7 1323 1612 2 Total no. of workers 313.7 42.2 481.7 566 787 3 No. of workers as % of population 37.1 39.1 39.8 42.8 48.8 4 No. of agricultural workers 185.3 234.1 263 23 22 Cultivators 11.7 127.3 118.7 11 - Agricultural labourers 74.6 16.8 144.3 12-5 % of agricultural workers to total workers 59.1 58.2 54.6 4.6 25.7 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 185.3 million vs. total workers at 313.7 million) to 54.6% in 211 (total agricultural workers at 263 million vs. total workers at 481.7 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

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 25.75 lakh 35 1. lakh 2) 15-2 Hp 25.75 lakh 35 1. lakh 3) 2-4 Hp 25 1. lakh 35 1.25 lakh 4) 4-7 Hp 25 1. lakh 35 1.25 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 5 1.25 lakh Paddy Thresher.2 lakh.25 lakh Source: Ministry of Agriculture, ICICIdirect.com Research ICICI Securities Ltd Retail Equity Research Page 1

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 21-11. 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) 2-1 25-6 21-11 2-1 25-6 21-11 75.4 83.7 92.4 29.8 32 35.4 22.7 23.9 24.7 32.1 33.1 35.1 14 14.1 13.8 38.2 37.9 37.5 6.6 6.4 5.9 38.2 36.6 33.7 1.2 1.1 1 21.1 18.7 17.4 All Holdings g g 119.9 129.2 137.8 159.4 158.3 159.1 (hectare/holding) p g 1.33 1.23 1.15 holdings (%) 81.8 83.3 85. 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

Monsoon Categorization (IMD) Monsoon Categorization Rainfall Range (% of LPA) Deficient <9 Below Normal 9-96 Normal 96-14 Above Normal 14-11 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 224.5 233.5-4 Northwest India 122.4 112.1 9 Central India 224.7 243.8-8 South Peninsula 21.4 215.5-7 East & northeast India 449.4 467.6-4 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

Rating Matrix Rating : Buy Target : 1845 Target Period : 12-18 months Potential Upside : 17% YoY Growth (%) (YoY Growth) FY14 FY15 FY16E FY17E Net Sales 29.6 (11.9) 6. 21.9 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 16.4 19.6 2.3 15.3 Target P/E 19.2 22.9 23.9 18. EV / EBITDA 1.4 12.5 12.3 9.1 P/BV 4.4 3.7 3.2 2.8 RoNW 26.5 19.1 16. 18.2 RoCE 36.8 25. 2.5 23.3 Stock Data Stock Data Market Capitalization 1358.2 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 9.8 2.6 12. (14.3) Mahindra & Mahindra 6.1.9 3.6 5.6 Escorts 25.1 (3.6) 3.8 7.8 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... 1572 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 ~ 1.2-1.4 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) 481.7 624.2 55.1 583.2 71.8 EBITDA ( crore) 72.1 118.9 1.3 96.2 124.4 Net Profit ( crore) 48.6 82.9 69.5 66.8 88.6 EPS ( ) 56.2 95.9 8.4 77.3 12.5 P/E (x) 28. 16.4 19.6 2.3 15.3 Price / Book (x) 5.6 4.4 3.7 3.2 2.8 EV/EBITDA (x) 18.4 1.4 12.5 12.3 9.1 RoCE (%) 28.1 36.8 25. 2.5 23.3 RoE (%) 19.9 26.5 19.1 16. 18.2 ICICI Securities Ltd Retail Equity Research Page 13

Shareholding pattern (%) Q4FY15 Shareholder's Category Holding (%) Promoters 54. Institutional Investors 17.7 General Public 28.3 FII & DII holding trend (%) % 12 1 8 6 4 2 1.6 8.9 9.1 9.6 7.6 8.1 5.3 5.4 5.9 4.5 3.3 3.4 3. 3.4 2.3 2.3 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 27252 units; Realisation 125661/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

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

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 21-11 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) 2-1 25-6 21-11 2-1 25-6 21-11 75.4 83.7 92.4 29.8 32 35.4 22.7 23.9 24.7 32.1 33.1 35.1 14 14.1 13.8 38.2 37.9 37.5 6.6 6.4 5.9 38.2 36.6 33.7 1.2 1.1 1 21.1 18.7 17.4 All Holdings g g 119.9 129.2 137.8 159.4 158.3 159.1 (hectare/holding) p g 1.33 1.23 1.15 holdings (%) 81.8 83.3 85. 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 ~ 2.5-8 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

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 4 35 3 25 2 15 1 5 1 118 178 212 267 31 261 342 295 units 3 25 2 15 1 5 127684 11588 122745125661 14 111181 113839 1674 12 96714 949 1 151 12174 16691 1968 23449 26154 21231 27252 2314 8 6 4 2 /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 127684/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 6 5 4 3 2 1 46.6 42.4 24791 151 26135 12174 49.2 48.7 48.1 47.3 35294 16691 38794 1968 551 42.6 6 23449 26154 43.6 45.2 47 21231 56 27252 48 2314 FY7 FY8 FY9 FY1 FY11 FY12 FY13 FY14 FY15 5 48 46 44 42 4 38 % 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. 24791 units in FY7. ICICI Securities Ltd Retail Equity Research Page 17

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 % 5 4 3 2 1-1 -2-3 42. 3537.1 28.4 23. 19.1 15.9 14.2 9.9 11.5 8.9 5.4 FY8 FY9 FY1 FY11 FY12 FY13 FY14 FY15-14.3-15.2-18.8-21.7 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 ~ 1.2-1.4 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 4 35 3 25 2 15 1 26.6 342.5 295. 39.2 376.8 no of units 4 3 2 1 122745 125661 127684 124491 121379 21231 27252 2314 24837 3146 15 1 5 / 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 127684/unit tin FY15 o 121379/unit in FY17E. ICICI Securities Ltd Retail Equity Research Page 18

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 25 2 15 1 5 194 165 176 154 15 81 5 3 34 FY7 FY8 FY9 FY1 FY11 FY12 FY13 FY14 FY15 units 8 7 6 5 4 3 2 1 26668 262922 3 247714 234442 21586 221331 25 1972 21379 197137 2 1537 1714 2327 3758 4735 738 6233 7452 6694 FY7 FY8 FY9 FY1 FY11 FY12 FY13 FY14 FY15 15 1 5 /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 262922/unit in FY15 ( 197137/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%. 1 9 8 7 6 5 4 3 2 1 4.5 5.5 6.6 8.6 2.7 3.2 11.4 1.5 11.2 29.1 28.5 27.7 32.4 31.3 27.2 25.7 22.3 39.9 3.6 34.1 43.1 46.6 49.6 5.3 51.5 53.8 37.6 1.7 7.6 6.6 5.4 2.4 1.9 15.6 16.2 14.5 12.6 12.5 1.5 5.2 6.2 9.6 3.4.8 1. 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

Exhibit 38: Tractor sales growth (YoY) Domestically, total tractor sales have grown at a CAGR of 7.3% in FY7-15 to 5.5 lakh units in FY15 (3.1 lakh units in FY7). Tractor sales in the <3 hp segment have largely remained flat and grew at a CAGR of.5% in FY7-15 to ~6, units in FY15. M&M is the market leader in this segment with a market share in excess of 5% while the second position is firmly held by TAFE with a market share of ~3%. The third position has been captured by VST with a market share of ~11%. Outperformance; within industry and segment VST has, on the whole, outperformed its industry and segmental growth rates in the recent past, which clearly showcases the company s intent to become a prominent player in the domestic tractor business and increase its market share domestically. % 8 6 4 2-2 -4 61.5 48.6 35.8 32.233.7 26. 29.9 19.8 2.2 19.6 11.5 11.314.6.6 4.7-3.5FY8-1.7-7.7 FY9-3.7 FY1 FY11 FY12 FY13 FY14 FY15-11.4-13. -1.2-15.5-33.7 Total Tractor Sales Growth (YoY) Tractor Segment (<3hp) Sales Growth (YoY) VST Tractor Sales Growth (YoY) Source: Crisil, Company, ICICIdirect.com Research Thus, it has been observed that apart from FY13 wherein there were some internal supply side issues within VST, the company s tractor sales growth have always exceeded both the total industry growth rate as well its segmental growth rate, albeit on a lower base Exhibit 39: VST tractor sales (value) Tractor sales expected to grow at a CAGR of 14.3% in FY15-17E VST has recently undertaken a capex programme wherein it established a new tractor manufacturing facility in Hosur, Tamil Nadu with a capacity to manufacture 36, units annually (in two shifts per day). The company has also hired a new team headed by a new marketing manager wherein their prerogative is to record healthy sales growth (upward of 25%) in the tractor segment, going forward. Exhibit 4: VST tractor sales (volume & realisation) crore 25 2 15 1 5 23.1 194.3 176. 188.8 154.4 FY13 FY14 FY15 FY16E FY17E no of units 1 9 8 7 6 5 4 3 2 1 26668 262922 247714 256349 24994 6233 7452 6694 7363 924 FY13 FY14 FY15 FY16E FY17E Sales Volume Realization 3 25 2 15 1 5 / unit Going forward, we expect sales in this segment to grow at a CAGR of 14.3% in FY15-17E to 23 crore in FY17E. Sales volumes are expected to grow at a CAGR of 17.3% in FY15-17E to 924 units in FY17E. Realisations are expected to decline at a CAGR of 2.5% in FY15-17E primarily on the back of softer saw material prices. ICICI Securities Ltd Retail Equity Research Page 2

VST has the potential to generate power tiller sales worth ~ 7 crore (FY15 sales at 295 crore) and tractor sales worth ~ 8 crore (FY15 sales at 176 crore) if it manages to ramp up capacity utilisation to 9%, translating to a total sales potential of ~ 15 crore (FY15 sales at 55 crore) Capacity in place; poised to benefit from demand revival VST has just recently concluded its capex programme wherein it has shifted its tractor facility out of its existing plant in Whitefield, Bengaluru to Hosur, Tamil Nadu. The company incurred a capex worth 7 crore for the same that was entirely funded through internal accruals. VST s current manufacturing capacity stands at 6, units for power tillers and 36, units for agricultural tractors, thereby implying a capacity utilisation of ~4% in case of power tillers (production ~24, units, capacity 6, units) and ~2% in case of agricultural tractors (production 7 units, capacity 36 units). Therefore, the company has surplus capacity and does not need any incremental capex at least in the next three to four years, going forward. VST is all poised to benefit from a revival in domestic demand in power tillers and tractors. Exhibit 41: Capex spend ( crore) 4 35 31.5 36.5 Major capex spend; FY3-15 FY13-15 were capex heavy years for VST wherein large sums of money were spent on establishing a tractor plant at Hosur (total capex at ~ 7 crore) vs. usual opex of 1 crore per year crore 3 25 2 15 1 5 16.67 5.73 1.4 22 1 1 FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E Going forward, on the back of no major capex plans, we have built in an operational capex amounting to ~ 1 crore/year for FY16E and FY17E. Strong FCF generation over FY15-17E; FCF yield to inch up to ~5% VST s FCF generation was strong in FY14 wherein it generated FCF of ~ 1 crore. However, the same dropped to almost zero in FY15 primarily on the back of an increase in working capital (WC) on account of stress in the rural economy and capex on the new tractor facility. Exhibit 42: VST FCF & FCF yield 12 1. 1 7.3 8. VST is expected to generate an FCF yield of ~5% in FY16E and FY17E crore 8 6 4 2-2 1.1 14.5 99.7 74.1 7.7 -.1 -.9 5.5 5.2 FY13 FY14 FY15 FY16E FY17E 6. 4. 2.. -2. % FCF FCF Yield Going forward, we expect VST to generate robust free cash flows (FCF) to the tune of ~ 74 crore in FY16E and ~ 71 crore in FY17E primarily on the back of demand recovery, working capital improvement and minimal capex requirements. ICICI Securities Ltd Retail Equity Research Page 21

Exhibit 43: Consolidated revenue trend Financials Revenues to grow at 13.7% CAGR in FY15-17E We expect VST to clock modest revenue growth at 13.7% CAGR in FY15-17E to 71.8 crore in FY17E ( 55.1 crore in FY15). In the power tiller segment, revenues are expected to grow at a CAGR of 13.% in FY15-17E to 376.8 crore in FY17E ( 295 crore in FY15), primarily on the back of increasing farm mechanisation penetration domestically and as VST is best placed to capture the incremental demand in the power tiller segment. In the tractor segment, sales are expected to increase at a CAGR of 14.3% in FY15-17E to 23 crore in FY17E ( 176 crore in FY15). This is primarily on the back of the management s renewed focus on increasing its market share in the domestic tractor market post the commissioning of the new tractor manufacturing plant at Hosur, Tamil Nadu. Exhibit 44: Revenue break-up (power tillers and tractors) crore 8 6 4 481.7 624.2 55.1 583.2 71.8 crore 4 3 2 26.6 154.4 342.5 194.3 295. 176. 39.2 188.8 376.8 23.1 1 2 FY13 FY14 FY15 FY16E FY17E FY13 FY14 FY15 FY16E FY17E Power Tiller Sales Tractor Sales FY15 was a subdued year for VST as revenues declined ~12% YoY primarily on the back of the subdued purchasing power of domestic farmers on account of muted cropping seasons and a delay in executing subsidy schemes on part of various state governments. Exhibit 45: Revenue share mix (%) 1 8 6 13.6 13.8 14.4 14.6 14.6 32.2 31.2 32. 32.4 32.4 % 4 2 54.3 55. 53.6 53. 53. FY13 FY14 FY15 FY16E FY17E Power Tillers Tractors others The share of power tillers in the overall revenue mix is expected to moderate from 55% in FY14 to 53.% in FY16E and FY17E, going forward. For the tractor segment, the same is expected to improve from 31% in FY14 to 32% in FY16E and FY17E, going forward. ICICI Securities Ltd Retail Equity Research Page 22

EBITDA to grow at 11.4% CAGR in FY15-17E We expect EBITDA to grow at a CAGR of 11.4% in FY15-17E to 124 crore in FY17E, primarily on the back of an increase in sales to the tune of 13.7% in the aforesaid period. EBITDA margins, however, are expected to moderate from 18.2% in FY15 to 16.5% in FY16E primarily on the back of VST passing on the benefits of lower raw material (steel) prices to its end customers and the competitive nature of the domestic power tiller and tractor industry. EBITDA margins are expected to improve 1 bps to 17.5% in FY17E as benefits of operating leverage start kicking in by virtue of increased sales out of the same fixed asset base i.e. better capacity utilisation levels (increased asset turnover). Exhibit 46: EBITDA & EBITDA margins (%) trend 14 25 crore 12 1 8 6 4 2 15. 72.1 19. 118.9 18.2 1.3 16.5 96.2 17.5 124.4 2 15 1 5 % FY13 FY14 FY15 FY16E FY17E EBITDA EBITDA Margin Asset (gross block) turnover at VST has always stayed strong in the range of 3.-5.9x in FY7-15 with the peak in FY12 wherein the asset turnover stood at 5.9x. The same in FY15 stood at 3.x and is expected to improve to 3.5x by FY17E, thereby benefiting VST as the benefits of operating leverage start kicking in for the company Exhibit 47: Asset turnover Particulars Units FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E Sales crore 344 425 531 482 624 55 583 711 Gross Block crore 79 84 9 114 164 184 196 26 Asset Turnover x 4.3 5.1 5.9 4.2 3.8 3. 3. 3.5 PAT to grow at 12.9% CAGR in FY15-17E We expect PAT to grow at a CAGR of 12.9% in FY15-17E to 88.6 crore in FY17E ( 69.5 crore in FY15) on the back of a pick-up in sales and moderation in EBITDA margins. Exhibit 48: Consolidated PAT trend crore 1 9 8 7 6 5 4 3 2 1 12.5 95.9 8.4 77.3 56.2 48.6 82.9 69.5 66.8 88.6 FY13 FY14 FY15 FY16E FY17E 12 1 8 6 4 2 /share PAT EPS ICICI Securities Ltd Retail Equity Research Page 23

Exhibit 49: RoIC, RoCE & RoE trend RoCE, RoE set to moderate, core RoICs set to improve after blip! On the back of a moderation in EBITDA margins and higher equity base, RoEs and RoCEs are set to decline, going forward. We expect RoCE to decline from 25.% in FY15 to 23.3% in FY17E. The RoE is also expected to decline from 19.1% in FY15 to 18.2% in FY17E. The core RoICs are, however, set to improve from 31.% in FY15 to 37.% in FY17E primarily on the back of increasing capacity utilisation and corresponding sales and PAT, going forward. Exhibit 5: EPS, DPS & dividend payout % 6 5 4 3 2 1 31.4 28.1 19.9 52.8 36.8 26.5 31. 29.7 25. 2.5 19.1 16. 37. 23.3 18.2 /share 12 1 8 6 4 2 16.1 15.6 56.2 9. 95.9 15. 8.4 18.7 15. 19.4 19.5 77.3 15. 12.5 2. 25 2 15 1 5 % FY13 FY14 FY15 FY16E FY17E RoCE RoE RoIC FY13 FY14 FY15 FY16E FY17E EPS DPS Dividend Payout Dividend payout has been muted with the company s average dividend payout in the last five years i.e. FY11-15 at ~17% despite a debt free and cash rich balance sheet. One logical reason for the same could be the planned expansion of the tractor facility. However, going forward, with the capex cycle behind it and no major expansion plans, the dividend payout may increase. However, we have built in conservative estimates due to the absence of a clear dividend policy. Going forward, we expect the company to record an EPS of 77.3 in FY16E and 12.5 in FY17E. The corresponding dividend is expected at 15./share in FY16E and 2./share in FY17E. Volatile working capital; build in conservative estimates As VST operates in a highly subsidy driven industry, WC at VST has been quite volatile with the five year average (FY11-15) net working capital days at 72 days. Going forward, we have built in conservative net working days at 85, 8 days in FY16E, FY17E, respectively. Exhibit 51: Net working capital days 1 8 92 94 85 8 no of days 6 4 47 2 FY13 FY14 FY15 FY16E FY17E ICICI Securities Ltd Retail Equity Research Page 24

Risks & Concerns Erratic weather/bad monsoons As a farm equipment player, VST is not immune to the performance of south west monsoons, which affects the purchasing power of domestic farmers. In the past eight years, it has been observed that whenever there are below normal (rainfall at 9-96% of LP, FY13) or deficient monsoons (rainfall at <9% of LPA, FY15), the sales declined by an average 1%. FY1 was an exceptional year with robust sales (up 25% YoY) despite bad monsoons on account of the farm debt waiver scheme being implemented by the erstwhile UPA government. The drop in sales during sub-par monsoons is more severe in case of power tillers vis-à-vis tractors in the aforesaid period. Exhibit 52: VST net sales sensitivity to south west monsoons Power Tiller Power tillers Tractor sales Tractor Total Net YoY Agri GDP at Constant Price YoY Agri GDP at YoY Net sales growth/agri GDP Fiscal sales volume sales volume sales Sales Growth Rainfall (24-5) Growth Current Prices Growth Growth rate Year (units) ( crore) (units) ( crore) ( crore) % % from LPA crore % crore % % FY7 151 1 1537 3 162.3 1 523745 4.1 64672 12.6 FY8 12174 118 1714 34 188.6 16.2 16 556956 6.3 716276 18.5.9 FY9 16691 178 2327 5 274.1 45.3 98 555442 -.3 86646 12.6 3.6 FY1 1968 212 3758 81 344.5 25.7 78 557715.4 928586 15.1 1.7 FY11 23449 267 4735 15 425.3 23.5 12 6195 9.5 1143517 23.1 1. FY12 26154 31 738 165 53.6 24.8 11 643543 5.3 13569 13.7 1.8 FY13 21231 261 6233 154 481.7-9.2 92 649424.9 1417468 9. -1. FY14 27252 342 7452 194 624.2 29.6 16 681412 4.7 165382 16.7 1.8 FY15 2314 295 6694 176 55.1-11.9 88 NA.2 NA 4.4-2.7 It has been observed that for every 5% increase in steel price and VST s realisation remaining same; our target price reduces ~14.% i.e. 23/share Therefore, going forward, any sub normal monsoon activity may limit the topline growth at VST and will have an adverse impact on the company s profitability, thereby directly impacting our target price calculation. Volatility in raw materials prices, especially steel price Iron derivative products like pig iron, iron castings, stampings, metal sheets, etc. comprise the major raw material costs for power tillers & tractors with the management guiding that ~5% of the sales value is constituted by iron products (5%of sales equivalent to ~75% of raw material costs; raw material as a percentage of sales at ~65%). Exhibit 53: Steel i.e. key raw material price sensitivity (FY17E numbers) Drop in Steel Price Rise in Steel Price Particulars Units -1% -5% Base Case 5% 1% RM as a % of Sales % 6. 62.5 65 67.5 7. EBITDA Margins % 22.5 2. 17.5 15. 12.5 Change in PAT % 28. 14. NA -14. -28. Change in EPS % 28. 14. NA -14. -28. Target Price % 211 187 164 141 1179 Source: ICICIdirect.com Research We have modelled that steel price is a complete pass through for the company. However, any inability of the company to pass through the increase in steel costs will dent EBITDA margins and have a consequent negative impact on our target price calculation. Delay in subsidy execution & competition The domestic power tiller industry is highly subsidy driven with subsidy support @ 3-4% of the cost of equipment. Therefore, any delay in subsidy execution will dent its sales growth and working capital discipline. On the back of robust growth expected in the power tiller segment, it is possible that new players may enter the segment. This may increase the competition and dent the market share/volume for VST. ICICI Securities Ltd Retail Equity Research Page 25

Valuation Exhibit 54: Two year forward P/E (VST currently trading at 15.3x) 2 18 16 14 12 VST Tillers & Tractors (VST) is a farm equipment manufacturer wherein it manufactures power tillers and tractors at its facilities in Bengaluru and Hosur (Tamil Nadu), respectively. The company is a leading power tiller player domestically with total power tiller sales for FY14 at 27252 units (market share 48.7%). In FY15, however, tiller sales volumes came in lower at 2314 units. This was on the back of limited purchasing power of domestic farmers and a delay in subsidy scheme execution by some state governments. On the tractors front, VST is a strong player in the small agricultural tractors and manufactures tractors of <3 hp (sales at 6694 units in FY15, corresponding market share ~11%). The central government is focused on increasing farm mechanisation domestically while VST is extremely focused on maintaining its market share in the power tiller segment while at the same time increasing its 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. 18.x P/E on FY17E EPS of 12.5/share and assigned a BUY recommendation to the stock. VST is a debt free company with cash & cash equivalents of 14 crore as of FY15. The company also boasts of superior return ratios with five year (FY11-15) RoCE and RoE at 32% and 24%, respectively. VST essentially qualifies as a portfolio stock with a long term investment horizon. Subdued monsoons, however, are a risk to our call since it tends to reduce the purchasing power of domestic farmers with a consequent drop in sales for agri input companies including VST Tillers & Tractors. ( ) 1 8 6 4 2 Jan-9 Jul-9 Jan-1 Jul-1 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Price 17x 14x 12x 1x 8x 5x 3x Source: Reuters, ICICIdirect.com Research ICICI Securities Ltd Retail Equity Research Page 26

Financial Summary Exhibit 55: Profit and Loss ( crore) (Year-end March) FY13 FY14 FY15 FY16E FY17E Net Sales 481.7 624.2 55.1 583.2 71.8 Other Operating Income - - 1.5 - - Total Operating Income 481.7 624.2 551.6 583.2 71.8 Other Income 2.1 8.7 11.8 12.4 16.9 Total Revenue 483.8 632.9 563.5 595.6 727.7 Raw Material Expenses 329.6 411.1 357.1 379.1 462. Employee Expenses 28.1 36. 4.6 46.7 53.3 Manufacturing Exp 49.3 55.3 53.7 61.2 71.1 Total Operating Expenditure 49.6 55.3 451.3 487. 586.4 EBITDA 72.1 118.9 1.3 96.2 124.4 Interest 1.3 1.8 2.1 - - PBDT 72.9 125.8 11. 18.6 141.3 Depreciation 3.4 3.9 9.4 1.4 11.1 PBT 69.6 121.9 1.6 98.2 13.2 Total Tax 21. 39. 31.2 31.4 41.7 PAT before MI 48.6 82.9 69.5 66.8 88.6 Minority Interest - - - - - PAT 48.6 82.9 69.5 66.8 88.6 Exhibit 56: Balance Sheet ( crore) (Year-end March) FY13 FY14 FY15 FY16E FY17E Equity Capital 8.6 8.6 8.6 8.6 8.6 Reserve and Surplus 235.8 33.5 354.9 49.4 477.7 Total Shareholders funds 244.4 312.1 363.5 418. 486.3 Total Debt - - - - - Deferred Tax Liability 2.9 4.4 4.7 4.7 4.7 Minority Interest - - - - - Other Non Current Liabilities 18.6 26.1 31.7 36.7 41.7 Liability side total 266. 342.6 399.9 459.4 532.7 Total Gross Block 113.6 163.9 183.9 196. 26. Less Total Accumulated Depreciation 36.2 39.9 49.2 59.7 7.7 Net Block 77.4 124. 134.7 136.3 135.3 Total CWIP 14.1.1 2.1 - - Total Fixed Assets 91.5 124.1 136.8 136.3 135.3 Other Investments 4.2 4.2 9.4 9.4 9.4 Liquid Investments - 12.1 85.8 145.8 195.8 Inventory 82.9 86.6 1.2 111.8 126.6 Debtors 97.3 12.3 93.9 13.9 126.6 Loans and Advances 26.9 27.6 27.3 26.2 28.4 Other Current Assets.2.5.4.6.7 Cash 32.9 22.5 18.4 25.3 3.8 Total Current Assets 24.2 239.5 24.2 267.8 313.1 Creditors 58.1 18.7 52.7 79.9 97.4 Provisions 11.8 18.5 19.5 2. 23.4 Total Current Liabilities 69.9 127.2 72.2 99.9 12.7 Net Current Assets 17.3 112.3 168. 167.9 192.3 Assets side total 266. 342.6 399.9 459.4 532.7 ICICI Securities Ltd Retail Equity Research Page 27

Exhibit 57: Cash flow statement ( crore) (Year-end March) FY13 FY14 FY15 FY16E FY17E Profit after Tax 48.6 82.9 69.5 66.8 88.6 Depreciation 3.4 3.9 9.4 1.4 11.1 Cash Flow before working capital changes 53.2 88.6 81. 77.2 99.6 - - - - - Net Increase in Current Assets 6.1 (9.6) (4.9) (2.8) (39.8) Net Increase in Current Liabilities (13.3) 57.3 (55.) 27.6 2.9 Net cash flow from operating activities 46. 136.3 21.1 84.1 8.7 (Purchase)/Sale of Fixed Assets (31.5) (36.5) (22.) (1.) (1.) Liquid Investments 2.2 (12.1) 16.3 (6.) (5.) Other Non Current Liabilities 4.3 7.5 5.6 5. 5. Net Cash flow from Investing Activities (7.3) (129.6) (5.) (65.) (55.) Inc / (Dec) in Equity Capital - - - - - Inc / (Dec) in Loan Funds (16.) - - - - Total Outflow on account of dividend (9.1) (15.2) (15.2) (15.2) (2.2) Net Cash flow from Financing Activities (26.4) (17.) (2.2) (12.3) (2.2) - - - - - Net Cash flow 12.4 (1.4) (4.1) 6.8 5.5 Cash and Cash Equivalent at the beginning 2.6 32.9 22.5 18.4 25.3 Closing Cash/ Cash Equivalent 32.9 22.5 18.4 25.3 3.8 Ratios Exhibit 58: Ratio Analysis (Year-end March) FY13 FY14 FY15 FY16E FY17E Per Share Data EPS 56.2 95.9 8.4 77.3 12.5 Cash EPS 6.1 1.4 91.2 89.4 115.3 BV 282.9 361.3 42.7 483.8 562.9 Operating profit per share 83.5 137.6 116.1 111.4 144. Operating Ratios EBITDA / Total Operating Income 15. 19. 18.2 16.5 17.5 PAT / Total Operating Income 1.1 13.3 12.6 11.4 12.5 Return Ratios RoE 19.9 26.5 19.1 16. 18.2 RoCE 28.1 36.8 25. 2.5 23.3 RoIC 31.4 52.8 31. 29.7 37. Valuation Ratios EV / EBITDA 18.4 1.4 12.5 12.3 9.1 P/E 28. 16.4 19.6 2.3 15.3 EV / Net Sales 2.8 2. 2.3 2. 1.6 Sales / Equity 2. 2. 1.5 1.4 1.5 Market Cap / Sales 2.8 2.2 2.5 2.3 1.9 Price to Book Value 5.6 4.4 3.7 3.2 2.8 Turnover Ratios Asset turnover 1.9 2.1 1.5 1.4 1.4 Debtors Turnover Ratio 5. 6.1 5.9 5.6 5.6 Creditors Turnover Ratio 8.3 5.7 1.4 7.3 7.3 Solvency Ratios Debt / Equity - - - - - Current Ratio 3.4 1.9 3.3 2.7 2.6 Quick Ratio 2.3 1.2 1.9 1.6 1.5 ICICI Securities Ltd Retail Equity Research Page 28

Rating Matrix Rating : Buy Target : 111 Target Period : 12-18 months Potential Upside : 28% YoY Growth (%) (YoY Growth) FY14 FY15 FY16E FY17E Net Sales 27. (11.3) 4.7 21.4 EBITDA 26.9 (17.6) 1.1 25.4 Net Profit 21. (22.7) 8.4 22.8 EPS (Rs) 21. (22.7) 8.4 22.8 Valuation Summary FY14 FY15 FY16E FY17E P/E 16.1 2.9 19.3 15.7 Target P/E 2.6 26.6 24.6 2. EV / EBITDA 1. 12. 11. 8.6 P/BV 5.1 5.1 5. 4.7 RoNW 31.9 24.4 25.8 3.2 RoCE 38.8 29. 31.5 38.6 Stock Data Stock Data Market Capitalization 18.5 Crore Total Debt (FY15) Crore Cash and Investments (FY15) 181.9 Crore EV 898.6 Crore 52 week H/L 173 / 742 Equity capital 12.4 Crore Face value 1 MF Holding (%) 9.2 FII Holding (%) 6.8 Price Performance Return % 1M 3M 6M 12M Swaraj Engines 18.3 7.3 4.8 (.4) M & M 6.1.9 3.6 5.6 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) 1,2 1, 8 6 4 2 Jul-15 Swaraj Engines (SWAENG) Pseudo play on Swaraj (M&M) brand... 87 Swaraj Engines (SEL) is an engine manufacturer based in Mohali, Punjab). It serves the engine requirements of the Swaraj brand of tractors, owned by Mahindra & Mahindra (M&M). SEL manufactures engines catering to tractors in the 2-5 hp segment and caters to ~85% of the total engine requirement at M&M s Swaraj tractor division. The company has a current installed capacity to manufacture 75, units of engines. SEL is in the midst of expanding its capacity to 15, units (to be commissioned by Q2FY16). Sales have grown at an impressive CAGR of 23.2% in FY8-15 to 539.7 crore in FY15 ( 125.4 crore in FY8). Sales volumes (engines) have grown at a CAGR of 21.6% in FY8-15 to 64595 units in FY15 (1648 units in FY8). FY15, however, was a subdued year for SEL primarily on the back of low purchasing power of domestic farmers due to abnormal rains. Going forward, however, with the government s thrust on increasing farm yields through increasing penetration of farm mechanisation and Swaraj tractor s strong brand recall, SEL is on a strong footing. We expect sales and PAT to grow at a CAGR of 12.7% and 15.4%, respectively, in FY15-17E. SEL maintains a good payout ratio with average payout in the last three years at 72.7%. At the CMP, it offers an impressive dividend yield of ~4%. We have valued SEL at 111 i.e. 2x P/E on FY17E EPS of 55.5 with a BUY rating on the stock. Indian tractor industry on strong footing; Swaraj a prominent brand! The domestic tractor industry has been at the forefront of farm mechanisation penetration in India. Domestic tractor sales have increased at an impressive CAGR of 8.9% in FY8-15 to ~5.5 lakh units in FY15 (3. lakh units in FY8). FY15, however, was a subdued year for the domestic tractor industry (tractor sales at 5.5 lakh units, down 13% YoY) on the back of subdued agricultural activity due to abnormal rains in the last two cropping seasons. Swaraj is a prominent brand in the domestic market. It has a market share in excess of 1% within the ambit of its parent i.e. M&M, which has a combined market share of over 4% in the domestic tractor market. Going forward, on the back of the government s thrust on increasing farm mechanisation, the parent s focus on increasing the market share of Swaraj tractors and with timely capacity expansion in place, SEL is on a strong growth footing, going forward. Healthy financials; superior return ratios; re-rating warranted! SEL has a lean balance sheet with no debt on its books and cash & cash equivalents of 18 crore as of FY15. The average RoCEs and RoEs in the last five years (FY11-15) at SEL are at 35% and 28%, respectively, backed by strong dividend payouts. The company is essentially a quality play and should be held in one s portfolio with a long term investment horizon. Exhibit 59: Financial Performance (Year-end March) FY13 FY14 FY15 FY16E FY17E Net Sales ( crore) 479. 68.3 539.7 564.9 685.6 EBITDA ( crore) 71.4 9.6 74.7 82.2 13.1 Net Profit ( crore) 55.4 67. 51.8 56.1 68.9 EPS ( ) 44.6 53.9 41.7 45.2 55.5 P/E (x) 19.5 16.1 2.9 19.3 15.7 Price / Book (x) 5.6 5.1 5.1 5. 4.7 EV/EBITDA (x) 13. 1. 12. 11. 8.6 RoCE (%) 33.2 38.8 29. 31.5 38.6 RoE (%) 28.6 31.9 24.4 25.8 3.2 ICICI Securities Ltd Retail Equity Research Page 29

Shareholding pattern (%) Q4FY15 Shareholder's Category Holding (%) Promoters 5.6 Institutional Investors 16. General Public 33.4 FII & DII holding trend (%) % 12. 1.6 1.4 1.5 1.3 1.8 1.1 9.5 1. 9.2 8. 6.8 6.2 6. 5.5 4. 3.2 2.5 1.9 1.9 2. 1.5. Q1FY14 Q2FY14 Q3FY14 Q4FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY15 FII DII FII & DII - Major Shareholders (%) Q4FY15 Shareholder's Category Holding (%) Pinebridge Investments Asia Ltd 3.2 DSP Blackrock Micro Cap Fund 1.9 Franklin India Smaller Comp. Fund 1.6 National Westminster Bank PLC 1.4 SBI Magnum Midcap Fund 1.3 HDFC Small & Midcap Fund 1.2 Company background SEL is a joint holding of Kirloskar Industries (17.4% stake) and M&M (33.2% stake) with M&M the main promoter consequent to its acquisition of Punjab Tractors in 27-8. The Government of India originally set up the company in 1985 for manufacturing diesel engines for Punjab Tractors, which marketed their products under the Swaraj brand. SEL commenced production at its facility in Mohali in 1988 and has been a profitable entity since then. Since inception, the company also had a technical collaboration with Kirloskar Industries (KIL) that also bought ~17% stake in SEL, thereby partnering with SEL in all its technical, designing and functional needs. However, from 25-6, the company has ended its technical collaboration with KIL and developed in-house capability & facilities for modernisation and technological upgradation of its products. SEL also ropes in some consultancy firms as and when the need arises but does not have a fixed collaboration with any other major player in the industry. The company does not pay any royalty to either of its promoter companies viz. M&M and KIL. SEL manufactures engines catering to tractors in the 2-5 hp segment and is currently in the process of developing an engine for the >5 hp segment. The company also manufactures hi-tech engine components for commercial vehicles for SML Isuzu (erstwhile Swaraj Mazda). The contribution to the topline, however, remains limited (<3%). Exhibit 6: Engine sales; hp break-up 41-5 hp 4% <=3 hp 1% 31-4 hp 5% As far as segmental sales are concerned, SEL manufactures ~1% engines catering to the <=3 hp tractor segment, ~5% engines catering to the 31-4 hp tractor segment and ~4% engines catering to the 41-5 hp tractor segment. SEL s margins vary across the hp segment with margins more accretive in the higher hp segment. Exhibit 61: Sales segmentation (FY15) Net Sales 54 crore in FY15 Total net sales in FY15 stood at 54 crore with majority i.e. ~97% comprising engines Engines 525 crore in FY15 (97.2%) Engine Components 2 crore in FY15 (.4%) Spare and Others 13 crore in FY15 (2.4%) ICICI Securities Ltd Retail Equity Research Page 3

Investment arguments Domestic tractor market on strong footing; penetration set to increase The domestic tractor industry has been at the forefront of farm mechanisation in India with tractor sales increasing at a CAGR of 7.3% in FY7-15 to ~5.5 lakh units in FY15 (3.1 lakh units in FY7). Within segments, main growth was witnessed in the segment of 41-5 hp, which has grown at a CAGR of 17.5% to 2.6 lakh units over FY7-15 (7 thousand units in FY7). This reflects the preference of tractors for farming as well as other allied services like haulage of construction material and personnel. On the other hand, sales of small hp tractors i.e. <= 3 hp & 31-4 hp, which are primarily meant for agricultural activities, have grown at a CAGR of.5% & 2.5%, respectively, in FY7-15. Exhibit 62: Domestic tractor sales Category FY7 FY8 FY9 FY1 FY11 FY12 FY13 FY14 FY15 FY 7-15 CAGR <= 3 hp 57669 5328 51214 68477 71721 82224 5456 7811 59866.5 31-4 hp 1664 153338 152941 194488 214348 244431 233397 22332 22497 2.5 41-5 hp 7342 734 71414 94183 13718 14312 19913 3881 25627 17.5 >=5 hp 1953 23398 2953 45438 5937 67134 4735 31228 3283 6.7 Total 313941 32948 34622 42586 482286 536891 527768 634151 551463 7.3 Source: Crisil, ICICIdirect.com Research Exhibit 63: Domestic tractor sales (segmental share) 1 6.2 7.7 9.5 11.3 12.2 12.5 7.7 4.9 6. 8 22.4 24.1 23.4 23.4 28.4 26.7 37.7 48.7 46.5 6 % 4 2 53. 5.6 5.2 48.3 44.4 45.5 44.2 35.2 36.7 18.4 17.6 16.8 17. 14.9 15.3 1.3 11.2 1.9 FY7 FY8 FY9 FY1 FY11 FY12 FY13 FY14 FY15 <= 3 hp 31-4 hp 41-5 hp >=5 hp Source: Crisil, ICICIdirect.com Research In terms of composition, robust growth was seen in the 41-5 hp segment (17.5% CAGR in FY7-15) leading to significant market share gains of 24 bps to 46.5% in FY15 from 22.4% in FY7. On the other hand, maximum drop in market share was observed in the 31-4 hp segment wherein the percentage share dropped 16 bps to 36.7% in FY15 from 53.% in FY7. Going forward, on the back of subdued purchasing power of domestic farmers due to the last two muted cropping seasons, domestic tractor demand growth is expected to be negative in H1FY16E. Growth is expected to pick up in H2FY16 if south west monsoon 215 is fairly widespread and normal in nature. Long term growth of the domestic tractor industry is, however, pegged at 8-1% (as per industry estimates) till FY19E primarily on the back of the government s thrust on increasing crop yields through greater farm mechanisation, increasing penetration of tractors in low tractor density states mainly southern & western regions, replacement demand from high tractor density states (mainly the northern region) and a pick-up expected in domestic construction industry. This will increase tractor demand for haulage/commercial usages (non-farm usage comprises ~3% of tractor demand domestically). ICICI Securities Ltd Retail Equity Research Page 31

Exhibit 64: Tractor penetration across the globe (211) Domestic tractor penetration; lower than global peers The penetration of tractors is low in India in comparison to other developed and developing countries with domestic penetration at a mere.8 hp/hectare vs. 9.8 hp/hectare in West Germany and 4.1 hp/hectare in China. This, however, provides an opportunity of growth for the domestic tractor industry, which has miles to go before it reaches its summit. This bodes well for all tractor manufacturers domestically. 12 hp/hectare 1 8 6 4 9.8 8.2 7.6 7 4.5 4.1 4.1 3.7 2 2 1.9 1.8 1.6 1.6.8 West Germany Italy UK Japan France South Korea China Poland USA Turkey Korea Thailand Vietnam India Source: Crisil, ICICIdirect.com Research Southern, western regions to provide next leg of growth Tractor penetration is robust in the agrarian belt of northern region mainly Punjab, Haryana & Uttar Pradesh. The domestic tractor penetration, however, is low in the agrarian belt of southern and western India mainly Andhra Pradesh, Tamil Nadu & Maharashtra. Exhibit 65: Domestic agricultural characteristics - Regional Cropping Intensity Irrigation Penetration M&M Market Share Tractor Market Region 211-12 (%) 211-12 (%) FY15 (%) Outlook Northern Region Punjab 191.2 98.3 37.5 Neutral Haryana 184.7 87.5 33.9 Neutral Uttar Pradesh 155.3 76.7 37.5 Neutral to positive Rajasthan 135.9 36.3 28.5 Positive Southern Region Andhra Pradesh 123.3 49.3 46.8 Positive Tamil Nadu 118.1 59.7 53.5 Positive Karnataka 121.3 34.3 45.6 Positive Western Region Maharashtra 126.1 18.7 45.6 Positive Madhya Pradesh 147.8 36.5 34.6 Positive Gujarat 127.1 48.2 44.5 Positive Chattisgarh 121.1 29.1 46. Positive Eastern Region Bihar 141.7 67.4 45.2 Neutral to positive West Bengal 179.9 58.1 5.8 Positive Orissa 113 28.9 51.3 Positive All India 138.7 46.9 4.3 Source: Crisil, ICICIdirect.com Research Therefore, low penetration of tractors in the southern & western regions and the government s thrust on increasing farm productivity, particularly in the eastern states, bodes well for the domestic tractor industry. Thus, good tractor sales growth is expected, going forward, which should benefit domestic manufacturers. ICICI Securities Ltd Retail Equity Research Page 32

Exhibit 66: Domestic tractor market share - Players Mahindra & Mahindra leader domestically with dominant market share Mahindra & Mahindra (M&M) is the market leader in the domestic tractor market with a market share in excess of 4% in FY15, way above its nearest competitor that has a market share of ~24% (TAFE). M&M has grown its domestic tractor portfolio both organically as well as inorganically with market share gains of ~1 bps from 3.3% in FY7 to 4.3% in FY15. As far as segmental market share is concerned, M&M is also the market leader in all segments (<= 3 hp, 31-4 hp, 41-5 hp) except >=5 hp segment (segmental share at 6.% of overall tractor sales) wherein the pole positioned is occupied by TAFE. % 1 8 6 4 2 4.6 3.6 2.4 2.7 2.5 2.5 2.4 2.2 2.4 23.7 23.4 22.2 22.1 2.4 23.4 25. 24.8 24.4....... 8. 9.2 3.3 29.7 41.6 41.6 42.2 41.8 4.6 41. 4.3 3.7 4.4 6. 7. 8. 7.4 5.7 5.9 5.3 11.3 9.8 8.9 8.7 8.6 8.3 9.6 1.3 12. 14.1 14.6 13.5 13.2 13.2 11.4 11.6 1.7 1.4 FY7 FY8 FY9 FY1 FY11 FY12 FY13 FY14 FY15 Escorts Ltd International Tractors Ltd Johndeere Mahindra & Mahindra Ltd New Holland India Punjab Tractors Ltd. TAFE others Source: Crisil, ICICIdirect.com Research On the inorganic front, M&M had acquired Punjab Tractors (PTL) way back in FY8. The erstwhile PTL owned the Swaraj brand, which was ultimately acquired by M&M. M&M has over the years capitalised on the brand recall of Swaraj and grown its portfolio. Sales growth of Swaraj tractors has also exceeded the industry growth rate in all previous years i.e. FY8-15. Even in the years of negative volume growth rates for the industry i.e. FY8 & FY13, volumes of Swaraj tractors recorded positive sales volume growth. In FY15, on the back of a subdued demand scenario amid subdued purchasing power of domestic farmers, volumes at Swaraj brand de-grew 12.8% vs. industry de-growth of 13.% Swaraj - Trusted tractor brand; outperformance warranted! Exhibit 67: Domestic tractor sales- total and Swaraj Particulars Units FY7 FY8 FY9 FY1 FY11 FY12 FY13 FY14 FY15 Total Tractor Sales unit 313941 32948 34622 42586 482286 536891 527768 634151 551463 YoY Growth % 18.6-3.5.6 32.2 19.8 11.3-1.7 2.2-13. Swaraj Engine Sales unit 1772 1648 28539 39143 47413 55239 57377 7462 64595 Market Share % 5.6 5.4 9.4 9.7 9.8 1.3 1.9 11.7 11.7 YoY Growth % -7.3 73.9 37.2 21.1 16.5 3.9 29.1-12.8 Total Swaraj Tractor Sales* unit 25115 27871 33575 4651 5578 64987 6752 87132 75994 Market Share % 8. 9.2 11. 11.4 11.6 12.1 12.8 13.7 13.8 YoY Growth % 11. 2.5 37.2 21.1 16.5 3.9 29.1-12.8 Source: Crisil Research, Company, ICICIdirect.com Research *Total Swaraj volume calculated by keeping share of SEL engines for Swaraj Tractors constant at 85% (Post FY8) The market share of the Swaraj brand of tractors has increased from 9.2% in FY8 to 13.8% in FY15 implying a gain in market share of ~46 bps over a seven period. SEL i.e. Swaraj Engines is the supplier of engines (meets ~85% of engine requirements) for the Swaraj brand of tractors. Thus, on the back of a trusted promoter group that has a dominant market share in the domestic tractor industry market, renewed focus on increasing the market share of the Swaraj brand of tractors with SEL supplying ~85% of engine requirements at Swaraj tractors, SEL is on a strong footing. Hence, it is poised for a robust growth journey ahead. ICICI Securities Ltd Retail Equity Research Page 33

SEL: expanding capacities; sales & profitability to follow Post acquisition by M&M (i.e. post FY8), SEL has always operated at optimal capacity utilisation levels with utilisation levels at 96.2% (average) in FY1-15. During the aforesaid period, the company has undertaken three expansion programmes wherein it first increased its capacity from 36, units to 42, units in FY11, then to 6, units in FY12 and then finally to 75, units in FY13. All capacity additions were undertaken under the supervision of the main promoter group i.e. M&M as and when M&M sensed the greater demand for the Swaraj brand of tractors. Exhibit 68: SEL: Capacity, production & capacity utilisation trend 12 14 units 1 8 6 4 2 114.3 19. 79.8 49.2 45.6 36 1776 36 16417 36 28728 36 39254 42 4815 99.7 91.8 85.3 76.5 6 5599 75 57348 75 74786 75 63994 15 6769 64.4 15 8113 FY7 FY8 FY9 FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E Capacity Production Capacity Utilization 77.3 12 1 8 6 4 2 % As per media sources, M&M plans to launch six new tractor variants in the next three years in the domestic market, with the launch equally spread between M&M and Swaraj Tractors. New product launches in the Swaraj division bode well for SEL with incremental engine requirements at the Swaraj tractor division to be met by SEL Exhibit 69: SEL: Sales volume and realisation trend In FY14, the company achieved 1% capacity utilisation level (capacity: 75, units, production: 74,786 units) and could sense the greater demand for the Swaraj brand of tractors. Hence, SEL undertook an expansion plan wherein the company is expanding its capacity from 75, units to 15, units at a cost of 38 crore (to be completed by Q2FY16). SEL also undertakes continuous innovation and technology upgradation to meet the changing engine requirements at the Swaraj division at M&M. The company is also developing engines in the >5 hp segment that will further help augment sales at SEL. All expenses for the aforesaid expansion were undertaken from internal accruals. units 1 8 6 4 2 78481 79636 81344 81344 82564 7519 69559 6584 6553 6615 61677 1772 1648 28539 39143 47413 55239 57377 7462 64595 6769 8113 FY7 FY8 FY9 FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E 1 8 6 4 2 /unit Sales Volume Realization Going forward, we expect sales volumes at SEL to grow at a CAGR of 12.1% in FY15-17E to 8113 units in FY17E. We have assumed de-growth of 2% in H1FY16 and a pick-up in demand in H2FY16 so as to end FY16E with a marginal volume growth rate of 5%. FY17E volume growth is expected at 2.%. On the realisations front, given subdued steel prices, we have estimated flattish realisations. ICICI Securities Ltd Retail Equity Research Page 34

Exhibit 7: SEL: Net working capital days (break-up) Working capital - key hallmark of SEL! SEL, after being acquired by M&M, has drastically improved its working capital cycle with net working capital days reducing from 42 days in FY8 to four days in FY9. Thereafter, the net working capital has either been marginally negative or zero thereby implying prudent capital management at SEL. This has resulted in strong cash flow generation for the company with five year average CFO: EBITDA at.9x in FY11-15. Exhibit 71: SEL: Net working capital days days 6 5 4 3 2 1 49 42 43 37 38 38 36 36 35 35 32 3 3 3 27 25 26 27 28 22 22 9 8 1 5 7 5 5 5 5 FY8 FY9 FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E Inventory Days Debtor Days Creditor Days no of days 5 4 3 2 1-1 -2 42 4 2 FY8 FY9 FY1 FY11 FY12 FY13-1 FY14 FY15 FY16E FY17E -6-6 -5-9 Exhibit 72: RoIC, RoCE & RoE trend Conservatively, going forward, we have assumed nil net working days in FY16E and FY17E. Superior return ratios; excellent dividend yield!! The return ratio profile for SEL has been superior with five year average RoCEs and RoEs at 35% and 28%, respectively in FY11-15. Going forward, on the back of a pick-up in tractor (Swaraj) demand/capacity expansion and consequent engine sales at SEL, we expect return ratios to inch up in FY16E and FY17E. The core return ratio i.e. RoICs has, however, been above 1% post acquisition by M&M with five year average RoICs at 219% in FY11-15. Exhibit 73: EPS, DPS & dividend payout 5 25 6 1 % 4 3 2 1 33.2 28.6 15.6 38.8 31.9 214.4 29. 24.4 194. 219.3 2 146.4 15 31.5 25.8 38.6 3.2 1 5 % /share 5 4 3 2 1 44.6 33. 74. 53.9 35. 64.9 79.2 77.4 41.7 33. 45.2 35. 55.5 4. 72.1 8 6 4 2 % FY13 FY14 FY15 FY16E FY17E RoCE RoE RoIC FY13 FY14 FY15 FY16E FY17E EPS DPS Payout Ratio Dividend payout at SEL has been excellent with the company s average dividend payout in the last five years (FY11-15) at ~55%. Since FY13, SEL has been paying dividend per share in the range of 33-35/share primarily on the back of a debt free, cash rich balance sheet and absence of any major capex plans. We expect this healthy dividend to continue, going forward. This is primarily on the back of no major need for cash as the ongoing capex programme is on the verge of completion, with dividend/share expected at 35/share & 4/share in FY16E & FY17E, respectively, thereby offering an attractive dividend yield of ~4-5%. ICICI Securities Ltd Retail Equity Research Page 35

Financials Revenues to grow at 12.7% CAGR in FY15-17E We expect SEL to clock modest revenue growth at 12.7% CAGR in FY15-17E to 685.6 crore in FY17E ( 539.7 crore in FY15). We expect sales volumes of engines at SEL to grow at a CAGR of 12.1% in FY15-17E to 8113 units in FY17E (64595 units in FY15). On the realisations front, we expect realisations to remain largely flat in FY15-17E with marginal growth of 1% in the aforesaid period, primarily on the back of softer raw material prices (mainly iron & steel products). Exhibit 74: Sales trend 8 7 6 5 479. 68.3 539.7 564.9 685.6 crore 4 3 2 1 - FY13 FY14 FY15 FY16E FY17E We have assumed sales volume de-growth of 2% in H1FY16 primarily on the back of a muted industry commentary amid subdued purchasing power of domestic farmers and sluggish construction activity domestically. For H2FY16, we expect sales volumes to pick up strongly at ~45%, albeit on a small base, primarily on the expectation of normal monsoons (present fear of below normal monsoons are slowly receding with monsoon, till date, in the current season at -4% of LPA vs. -12% of LPA for the overall last monsoon season). For full year FY16E, we expect sales volume growth at ~5% i.e. 6769 units. We expect sales volume growth of 2% in FY17E. This would primarily be on the back of increasing sales of Swaraj Tractor in low tractor density regions domestically and new product launches by parent (M&M) under the Swaraj brand. The consequent engine demand would flow down to SEL. Exhibit 75: Sales volume and realisation Exhibit 76: Quarterly sales volume & YoY growth units 1 8 6 4 2 78481 57377 82564 81344 81344 79636 7462 64595 6769 8113 FY13 FY14 FY15 FY16E FY17E Sales Volume Realization 83 82 81 8 79 78 77 76 /unit units 25 2 15 1 5 1635 Q1FY16E 1643-2 -2 Q2FY16E 1714 Q3FY16E 4 18516 Q4FY16E Sales Volume 5 19242 Q1FY17E 2 2 2 2 19252 Q2FY17E 2417 Q3FY17E 22219 YoY Grwoth Q4FY17E 6 5 4 3 2 1-1 -2-3 % ICICI Securities Ltd Retail Equity Research Page 36

EBITDA to grow 17.5% CAGR in FY15-17E We expect EBITDA to grow at a CAGR of 17.5% in FY15-17E to 13.1 crore in FY17E ( 74.7 crore in FY15), primarily on the back of sales growth (12.9% CAGR) and improvement in EBITDA margins to the tune of 12 bps to 15.% in FY17E (13.8% in FY15). SEL does not benefit from a drop in raw material prices as raw material costs are completely pass through for the company. However, operational efficiencies on the back of better capacity utilisation levels/asset turnover will be the main drivers for an improvement in EBITDA margins, going forward. Exhibit 77: EBITDA & EBITDA margins (%) trend 12 16 crore 1 8 6 4 2 71.4 14.9 14.9 9.6 74.7 13.8 82.2 14.5 13.1 15. 15 15 14 14 % - FY13 FY14 FY15 FY16E FY17E EBITDA ( crore) EBITDA Margin (%) 13 Asset (gross block) turnover at SEL has always stayed strong in the range of 1.8-4.7x in FY7-15 with the peak being in FY12 wherein the asset turnover was at 4.7x. The same in FY15 was at 3.3x. It is expected to improve to 3.6x by FY17E, thereby benefiting SEL as the benefits of operating leverage start kicking in for the company Exhibit 78: Asset turnover trend Particulars Units FY7 FY8 FY9 FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E Gross Block crore 67.5 7.1 71.3 71.9 77.6 96. 141.5 152.9 163.4 178.4 188.4 Sales crore 129. 125.4 28.2 282.4 36.7 448.6 479. 68.3 539.7 564.9 685.6 Asset Turnover x 1.9 1.8 2.9 3.9 4.6 4.7 3.4 4. 3.3 3.2 3.6 PAT to grow at 15.4% CAGR in FY15-17E We expect PAT to grow at a CAGR of 15.4% in FY15-17E to 68.9 crore in FY17E ( 51.8 crore in FY15) on the back of a pick-up in sales (12.7% CAGR in FY15-17E) and improvement in EBITDA margins (12 bps over FY15-17E). We expect EPS at 45.2/share and 55.5/share in FY16E and FY17E, respectively. Exhibit 79: Consolidated PAT trend crore 8 7 6 5 4 3 2 1-53.9 55.5 44.6 45.2 41.7 55.4 67. 51.8 56.1 68.9 FY13 FY14 FY15 FY16E FY17E Net Profit ( crore) EPS ( ) 6 5 4 3 2 1 - /share ICICI Securities Ltd Retail Equity Research Page 37

Cash flows to remain robust; FCF yield to inch towards ~6% By virtue of following prudent working capital management norms, the cash generation at SEL is healthy with CFO to EBITDA at 1.x in FY15. Going forward, we expect SEL to realise healthy cash flows with CFO- EBITDA averaging at ~.8x over FY15-17E. On the free cash flow (FCF) front, the company is on the verge of completing its existing capex programme (amounting to 38 crore). SEL is expected to report robust FCF, going forward. We expect SEL to record FCF of 45.8 crore in FY16E and 75.6 crore in FY17E, thereby generating a healthy FCF yield of ~6% over FY15-17E. Exhibit 8: CFO, EBITDA, CFO-EBITDA trend Exhibit 81: Free cash flow, free cash flow yield crore 12 1 8 6 4 2 88.8 71.4 1.2.9 1. 84. 9.6 71.1 74.7 56. 82.2.7 85.6 13.1.8 1.4 1.2 1..8.6.4.2 x crore 1 8 6 4 2 49.1 72.4 6.7 55. 5.1 45.8 4.2 75.6 7. 8. 6. 4. 2. % FY13 FY14 FY15 FY16E FY17E CFO EBITDA CFO :EBITDA. FY13 FY14 FY15 FY16E FY17E FCF FCF Yield. ICICI Securities Ltd Retail Equity Research Page 38

Risks & Concerns Erratic weather/bad monsoons may lead to demand volatility SEL witnessed good sales volume growth in FY1 despite deficient monsoon (78% of LPA) on account of farm debt waiver being implemented by the erstwhile UPA government. As SEL is a proxy play on farm mechanisation domestically, the company is not immune to the performance of the south west monsoons, which affects the purchasing power of domestic farmers. It has been observed that in case of below normal or deficient monsoons, the sales volume growth of SEL is adversely impacted. In FY13, when monsoons were below normal at 92% of LPA, sales growth was muted at 3.9% compared to healthy double digit growth witnessed in the past. In FY15, when monsoons were deficient (88% of LPA), SEL witnessed sales volume degrowth of 13%, thereby showing its vulnerability to south west monsoons. Exhibit 82: SEL net sales sensitivity to South West Monsoons Engine Sales Volume YoY Growth Net sales YoY Growth Rainfall Agri GDP at Constant Price (24-5) YoY Agri GDP at Current Growth Prices YoY Growth Net sales growth/agri GDP Growth rate Fiscal Year units % crore % % from LPA crore % crore % x FY7 1772 129 1 523745 4.1 64672 12.6 FY8 1648-7.3 125.4-2.8 16 556956 6.3 716276 18.5 -.2 FY9 28539 73.9 28.2 66. 98 555442 -.3 86646 12.6 5.2 FY1 39143 37.2 282.4 35.6 78 557715.4 928586 15.1 2.4 FY11 47413 21.1 36.65 27.7 12 6195 9.5 1143517 23.1 1.2 FY12 55239 16.5 448.57 24.4 11 643543 5.3 13569 13.7 1.8 FY13 57377 3.9 479 6.8 92 649424.9 1417468 9..8 FY14 7462 29.1 68.3 27. 16 681412 4.7 165382 16.7 1.6 FY15 64595-12.8 539.7-11.3 88 NA.2 NA 4.4-2.6 Therefore, going forward, any sub-par monsoon activity may impact volume growth of SEL. It will have an adverse effect on the profitability, thereby directly impacting our target price calculation. Volatility in raw materials prices, especially steel price Iron derivative products like pig iron, iron castings, stampings, metal sheets, etc. form the major raw material costs for engines with the management guiding that ~1% of the raw material costs comprise iron products that are equivalent to 75% of sales value. Exhibit 83: Steel i.e. key raw material price sensitivity (FY17E numbers) It has been observed that for every 2.5% increase in steel price and SEL s realisation remaining same, our target price reduces ~13.% i.e. 143/share Drop in Steel Price Rise in Steel Price Particulars Units -5.% -2.5% Base Case 2.5% 5.% RM as a % of Sales % 71.3 73.1 75 76.9 78.8 EBITDA Margins % 18.8 16.9 15 13.1 11.3 Change in PAT % 26. 13. NA -13. -26. Change in EPS % 26. 13. NA -13. -26. Target Price % 1396 1253 111 967 824 Source: ICICIdirect.com Research We have modelled steel price to be a complete pass through for the company. However, any inability of the company to pass through the increase in steel costs will dent EBITDA margins and have a consequent negative impact on our target price calculation. Competition Though M&M is the leader in the tractor market domestically and has grown the Swaraj brand well over the past few years, if competition is fierce that can impact sales of Swaraj tractors. Consequently, this may impact SEL s engine sales volume and dent the profitability of SEL. ICICI Securities Ltd Retail Equity Research Page 39

Valuation Exhibit 84: Two year forward P/E (SEL currently trading at 15.7x) 12 With timely expansion programmes (FY11; capacity increased from 36, units to 42, units; then to 6, units in FY12 and then finally to 75, units in FY13) coupled with increasing market share of the Swaraj brand of tractors (increased from 9.2% in FY8 to 13.8% in FY15) and SEL being present in all major tractor hp segments, SEL is on a strong footing. The company has a prominent role to play in the increase of farm mechanisation domestically. Consequently, sales have grown at an impressive CAGR of 23.2% in FY8-15 to 539.7 crore in FY15 ( 125.4 crore in FY8) wherein its sales volume (engines) have grown at a CAGR of 21.6% in FY8-15. FY15, however, was a subdued year for SEL primarily on the back of the low purchasing power of domestic farmers due to abnormal rains. Going forward, however, with the government s thrust on increasing farm yields through increasing penetration of farm mechanisation and Swaraj tractor s strong brand recall, SEL is on a strong footing. We expect sales and PAT to grow at a CAGR of 12.7% and 15.4%, respectively, in FY15-17E. SEL has a lean balance sheet with no debt on its books and cash & cash equivalents of 18 crore as of FY15. Average RoCEs and RoEs were at 35% and 28%, respectively, in the last five years (FY11-15). SEL also has good payout ratios with average payout in the last three years at 72.7% with FY15 dividend at 33/share (dividend yield ~4%). By virtue of following prudent working capital management norms, the cash generation at SEL is healthy with CFO to EBITDA at 1.x in FY15. Going forward, we expect SEL to realise healthy cash flows with CFO-EBITDA averaging at ~.8x over FY15-17E and FCF yields to inch towards ~6%. We have valued SEL at 111 i.e. 2x P/E on FY17E EPS of 55.5 and assigned a BUY recommendation to the stock. With fears of below normal monsoons receding and as the company is a proxy play on the farm mechanisation theme in India, Swaraj Engines is essentially a quality play and should be held in one s portfolio with a long term investment horizon. 1 8 ( ) 6 4 2 Jan-5 Jul-5 Jan-6 Jul-6 Jan-7 Jul-7 Jan-8 Jul-8 Jan-9 Jul-9 Jan-1 Jul-1 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Price 17x 15x 14x 12x 1x 8x 6x Source: Reuters, ICICIdirect.com Research ICICI Securities Ltd Retail Equity Research Page 4

Financial Summary Exhibit 85: Profit and Loss ( crore) (Year-end March) FY13 FY14 FY15 FY16E FY17E Net Sales 479. 68.3 539.7 564.9 685.6 Other Operating Income - - - - - Total Operating Income 479. 68.3 539.7 564.9 685.6 Other Income 15.3 17.5 16.3 15.2 14.8 Total Revenue 494.3 625.8 556. 58.2 7.4 Raw Material Expenses 364.5 462.3 49.1 423.7 514.2 Employee Expenses 22.1 27.7 3.8 33.8 38.4 Manufacturing Exp 21. 27.7 25.1 25.3 29.9 Total Operating Expenditure 47.6 517.7 465. 482.7 582.5 EBITDA 71.4 9.6 74.7 82.2 13.1 Interest.1.... PBDT 86.6 18.1 91. 97.4 117.9 Depreciation 7.2 9.1 13.2 13.7 15. PBT 79.5 97.8 77.8 83.8 12.9 Total Tax 24.1 3.8 26. 27.6 34. PAT 55.4 67. 51.8 56.1 68.9 Exhibit 86: Balance Sheet ( crore) (Year-end March) FY13 FY14 FY15 FY16E FY17E Equity Capital 12.4 12.4 12.4 12.4 12.4 Reserve and Surplus 181.3 197.4 199.7 24.9 215.8 Total Shareholders funds 193.8 29.8 212.1 217.4 228.2 Total Debt - - - - - Deferred Tax Liability 6.3 6.9 6.3 6.3 6.3 Minority Interest - - - - - Other Non Current Liabilities - - - - - Liability side total 2.1 216.8 218.4 223.7 234.5 Total Gross Block 141.5 152.9 163.4 178.4 188.4 Less Total Accumulated Depreciation 6.8 68.9 79.6 93.2 18.3 Net Block 8.8 84.1 83.8 85.2 8.1 Total CWIP 2.5 1.7 4.8 - - Total Fixed Assets 83.3 85.8 88.6 85.2 8.1 Investments 74.2 72.2 42. 52. 67. Inventory 39.3 46.4 33.1 46.4 56.3 Debtors 9.3 7.9 6.9 7.7 9.4 Loans and Advances 14.2 12.4 9.2 1.2 12.3 Other Current Assets - 4.6 5.6 5.6 6.9 Cash 8.7 14.9 139.9 124.8 127.3 Total Current Assets 143.5 176.1 194.7 194.8 212.2 Creditors 5. 63. 53. 54.2 65.7 Provisions 5.9 54.3 53.9 54.2 59.2 Total Current Liabilities 1.9 117.3 16.9 18.3 124.9 Net Current Assets 42.6 58.8 87.7 86.5 87.3 Assets side total 2. 216.8 218.4 223.7 234.5 ICICI Securities Ltd Retail Equity Research Page 41

Exhibit 87: Cash flow statement ( crore) (Year-end March) FY13 FY14 FY15 FY16E FY17E Profit after Tax 55.4 67. 51.8 56.1 68.9 Depreciation 7.2 9.1 13.2 13.7 15. Cash Flow before working capital changes 62.6 76.1 65. 69.8 84. Net Increase in Current Assets (.8) (8.5) 16.5 (15.2) (14.9) Net Increase in Current Liabilities 26.9 16.4 (1.4) 1.4 16.6 Net cash flow from operating activities 88.8 84. 71.1 56. 85.6 (Purchase)/Sale of Fixed Assets (39.7) (11.6) (16.1) (1.2) (1.) Liquid Investments 6.9 2. 3.2 (1.) (15.) Net Cash flow from Investing Activities (29.7) (9.) 13.5 (2.2) (25.) Inc / (Dec) in Equity Capital - - - - - Total Outflow on account of dividend (48.) (5.9) (49.3) (5.9) (58.1) Inc / (Dec) in Loan Funds - - - - - Net Cash flow from Financing Activities (48.1) (5.9) (49.6) (5.9) (58.1) Net Cash flow 11. 24.2 35. (15.) 2.5 Cash and Cash Equivalent at the beginning 69.7 8.7 14.9 139.9 124.8 Closing Cash/ Cash Equivalent 8.7 14.9 139.9 124.8 127.3 Ratios Exhibit 88: Ratio Analysis (Year-end March) FY13 FY14 FY15 FY16E FY17E Per Share Data EPS 44.6 53.9 41.7 45.2 55.5 Cash EPS 5.3 61.2 52.3 56.2 67.6 BV 156. 169. 17.8 175. 183.7 Operating profit per share 57.5 72.9 6.1 66.2 83. Operating Ratios EBITDA / Total Operating Income 14.9 14.9 13.8 14.5 15. PAT / Total Operating Income 11.6 11. 9.6 9.9 1.1 Return Ratios RoE 28.6 31.9 24.4 25.8 3.2 RoCE 33.2 38.8 29. 31.5 38.6 RoIC 15.6 214.4 194. 146.4 219.3 Valuation Ratios EV / EBITDA 13. 1. 12. 11. 8.6 P/E 19.5 16.1 2.9 19.3 15.7 EV / Net Sales 1.9 1.5 1.7 1.6 1.3 Sales / Equity 2.5 2.9 2.5 2.6 3. Market Cap / Sales 2.3 1.8 2. 1.9 1.6 Price to Book Value 5.6 5.1 5.1 5. 4.7 Turnover Ratios Asset turnover 2.5 2.9 2.5 2.6 3. Debtors Turnover Ratio 51.5 77.5 78.6 73. 73. Creditors Turnover Ratio 9.6 9.7 1.2 1.4 1.4 Solvency Ratios Debt / Equity - - - - - Current Ratio 1.4 1.5 1.8 1.8 1.7 Quick Ratio 1. 1.1 1.5 1.4 1.2 ICICI Securities Ltd Retail Equity Research Page 42

RATING RATIONALE ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns ratings to its stocks according to their notional target price vs. current market price and then categorises them as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock. Strong Buy: >15%/2% for large caps/midcaps, respectively, with high conviction; Buy: >1%/15% for large caps/midcaps, respectively; Hold: Up to +/-1%; Sell: -1% or more; Pankaj Pandey Head Research pankaj.pandey@icicisecurities.com ICICIdirect.com Research Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No 7, MIDC, Andheri (East) Mumbai 4 93 research@icicidirect.com ICICI Securities Ltd Retail Equity Research Page 43

ANALYST CERTIFICATION We /I, Chirag Shah PGDBM; Shashank Kanodia MBA (Capital Markets), Research Analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Terms & conditions and other disclosures: ICICI Securities Limited (ICICI Securities) is a full-service, integrated investment banking and is, inter alia, engaged in the business of stock brokering and distribution of financial products. 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ICICI Securities Ltd Retail Equity Research Page 44