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Sunday, December 26, 2010

VST Tillers Tractors Ltd:-The multibagger

Scripscan:VST Tillers Tractors Ltd
Bse code:531266
Cmp:440
Target:1500
Percentage return:330%
Duration:3-4 years

Story:A lot of my members were demanding a SIP kinda scrip which would create wealth periodically with safety and comfort.After a lot of careful research finally here's the one to satiate your desires.Five points to qualify VST Tillers Tractors Ltd as a great long term buy.

1)VST Tillers is Bangalore based company and has three manufacturing plants in the state of Karnataka. The company is a part of cash rich VST group.VST Tillers Tractors has a 40% market share in the Power Tillers Market in India. It also manufactures Low Hp Tractors.The main products of the Company namely Power Tillers and Tractors are used in the agricultural sector all over the India.A power tiller is like a miniature version of a tractor costind around 80000-1 lakh rs.Power tillers contribute around 60% of the company’s revenues.Tractors constitute around 20% of the turnover with the balance comes from diesel engines and spare parts. In India, the company has a presence in South India, northeast and in Orissa, Maharashtra and Gujarat. Exports contribute around 5% of the total sales. The company faces competition from low-priced power tillers imported from China.

2)VST is the market leader in power tillers with good brand recall among farmers.They also sell low HP tractors and rice transplanters where the growth seen is quite good.VST is a niche player in the smaller tractor segment, which is in good demand from farmers with small land holding.That apart, despite a comparatively smaller market, where it manufactures sub20 horse power tractors, the demand is quite buoyant and still exceeds the supply.The company also enjoys good technical help from Mitsubishi of Japan that has about 4% stake in the company.

3)Mechanised farming is increasingly becoming the norm. Increased yield in small farm landholdings is possible through use of power tillers and small tractors. The government has been doling out subsidies for farmers to adopt mechanized farming. The company’s product range, which specifically caters to the needs of small farmers, has good growth prospects. Growing at 25-30%, the power tiller segment is the most promising growth driver. Tractors, on a lower base, are estimated to grow 70-80% annually.VST tillers also owns about 20 acres of land in Whitefield and also another 9 acres on the outskirts of Bangalore.In case it decides on shifting to its other plant I believe that the market value of this property would be 70% of its present market capitalization. As a matter of fact even if it considers leasing it out the property could fetch substantial lease income annually.All these facts provides ample safety and confidence to own a pie of this great business.

4)I expect the government policies to remain positively biased towards power tillers and central subsidies would ensure steady demand for the products manufactured by VST tillers whose business model is completely India centric and in the rural domain.Given the Govt’s thrust to the sector and availability of finance from Micro Institutions, VST Tillers will benefit immensely in the years to come.The company has been generating steady cash flow from its operations. Since the last two years, the company has been investing in fixed assets in form of land.

5)VST Tiller has a strong balance sheet with nominal debt of Rs11 cr and cash of Rs15 cr on its books. Top line has grown at a CAGR of 27.5% over last 4 years (From Rs130 cr in FY06 to Rs345 cr in FY10) while bottom line has grown by 54.5% CAGR during the same period (From Rs 7.42 cr in FY06 to Rs42.33 cr in FY10).The turnover ratios, coverage ratio and Margins have also been improving year after year since the last 4 yrs. The company has been consistently paying dividend and it has increased over time. FY10 dividend is 75%. At CMP of Rs440, the stock is trading at a PE multiple of less than 5 times its FY13 earnings.I have been a big fan of the irrigational theme and VST tiller just fills the gap.Altogether a great long term buy.

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