Hold VST Tillers Tractors, target Rs 2220: ICICI Direct

ICICI Direct has a hold call on VST Tillers Tractors Ltd. with a target price of Rs 2220. The current market price of VST Tillers Tractors Ltd. is Rs 2342.5. Time period given by the brokerage is 12-18 Months when VST Tillers Tractors Ltd. price can reach defined target. VST Tillers Tractors Ltd., incorporated in 1967, is a smallcap company with a market cap of Rs 2069.08 crore.

Investment rationale by ICICI Direct

Tracking muted sales volume reported in Q1FY19, we downward revise our estimates for VST, going forward. At VST, we expect sales, EBITDA and PAT to grow at a CAGR of 10.1%, 12.5% and 3.5%, respectively, in FY18-20E. We model in power tiller sales volume CAGR of 5.8% and tractor sales volume CAGR of 8.6% in FY18-20E. This is largely in line with the management commentary of rather soft sales volume in the aforesaid period. On the positive side, VST has a capital efficient business model wherein it does ~3x asset turnover, realises ~15% margins and possesses a controlled working capital cycle (~60 days). Consequently, VST is expected to maintain healthy RoIC of ~25% and average operating cash flow yield of ~5.5%. On the balance sheet front, VST remains a cash surplus company (| 148 crore as of FY18). Overall, given the dependence on subsidies for its power tiller segment and low growth prospects, we revise our valuation multiple from 20x to 16x. We value VST at | 2220, i.e. 16x P/E on FY20E EPS of | 138.8 with a HOLD rating on the stock. Adding volatility to the earnings is the MTM gains/losses on equity investment book at VST.