Can niche products drive VST Tillers into the big league?
The VST Tillers Tractors Ltd stock hit a new 52-week high this week. Despite the company’s unexciting performance in the March quarter, the stock gained almost 20% in the last one month, as the management guided for healthy growth in fiscal year 2018 (FY18).
The company expects power tiller volumes to rise this year, after dropping 7% in FY17. Tractor sales, which increased 24% in FY17, are forecast to register double-digit growth this year also.
VST Tillers is trying to reduce its dependence on power tillers, which are dependent on government subsidy, which is prone to payment delays. Given the subdued outlook for the power tillers business (projected to see an annual average growth of 5-6%), the company is focusing on tractors for growth. It launched two new tractor models and aims to increase its market share further. According to ICICI Securities Ltd, VST Tillers’ management expects tractors to power tillers sales mix to reach 60:40 by 2020. Last fiscal year, the company derived 41% of its revenues from the tractors business.
The strategy sounds plausible. But it faces one challenge—scalability. Right now, VST Tillers operates in the less than 30 horsepower (hp) segment. It roughly constitutes less than 10% of the total tractor industry’s volumes. It is not present in the 30-40hp and 40-50hp categories, which constitute three-fourths of India’s tractor market and are seeing growth. “While the government’s push for increased farm mechanisation by subsidising tractor purchases is likely to aid sales in the lower HP segment, a continued customer shift towards increased usage of various agro-implements is likely to lead to a further increase in market size for high HP tractors over the long term,” ratings agency Icra Ltd said in a recent note.
In the overall tractor market, VST Tillers right now has less than 2% market share. It aims to increase this to 5%. New products and geographical expansion can help the company drive sales in the near term. But as an analyst with a domestic broking firm points out, it can be tough to make significant gains in market share without a presence in the large and fast growing 30-50hp segment.
That raises questions about sustainability of the growth momentum in the long run. While valuations at about 22 times current fiscal year earnings estimates are not cheap, two factors may be working in the stock’s favour. One is the positive outlook for tiller and tractor sales in the near term. The second is the hope that the company will continue to find niche opportunities. If VST Tillers , like Escorts Ltd, finds niche opportunities, then it could keep up the growth momentum. The only missing link is clarity.
Current tractor industry trends indicate that the opportunity in the 30hp segment is small. After the current leg-up in growth, what are the products that will drive growth in future years? Can the new non-tractor products emerge as a growth driver? These are the points investors will have to ponder over to take a long-term call on the stock.