VST TRACTORS

MARKET DATA (AS ON 26 Aug 2013 ) Price (Rs) 410.75 52 W 525.95 H/L(Rs) 330.00 Lat. P/E 6.71 Lat. 61.26 EPS(Rs) Mkt. 354.89 Lat.Eqty 8.64 Cap.(Rs Cr) (Rs Cr) Lat. BV(Rs) 282.09 Div. Yield 2.19 (%) Lat. Face 10 Beta0.4245 Value Sensex ABOUT VST / Vazir Sultan Tobacco Company (VST) is a Hyderabad based company incorporated in 1930 and is involved in the business of cigarettes and leaf tobacco. The company operates in collaboration with British American Tobacco (BAT), the worlds second largest tobacco manufacturer. VST is the third largest cigarette manufacturer in the country (7.5% share of the domestic cigarette market by volume in FY11), operating mainly in the lower end category of the industry with an annual installed capacity of 21,859 million sticks. The manufacturing unit is located in Azambad in Andhra Pradesh. Until FY08, VST was the dominant player in the nonfiltered cigarettes segment but it switched its business model from FY09 onwards (due to the average198.3% hike in excise duty on non-filtered cigarettes in FY09). Currently, the company derives ~96% of revenues from the filtered cigarettes business and only 4% from non-filtered cigarettes. VSTs flagship brands include Charminar (since 1994), Charms Virginia (since 1997), Special Extra Filter (since 2004) and Moments (since 2007). Currently, VST is also the largest domestic exporter of cigarettes to the Middle East and is further strengthening its position, thereby introducing a new brand Kingston Dual Filters, especially for the UAE market.

Shareholding Pattern (AS ON 30 Jun 2013) Foreign Institutions Govt Holding Non Promoter Corp. Hold. Promoters Public & Others Totals Latest Results Period-Ended

Shares 289504 457795 0 511815

(%) 3.35 5.3 0 5.92

4652064 53.85 2728350 31.58 8639528 100

201306 201206 Var. (%) Sales 149.1 128.69 15.86 Other Income 1.84 0.81 127.16 PBIDT 28.56 21.86 30.65 PBDT 28.2 21.6 30.56 PBIT 27.61 21.07 31.04 PBT 27.25 20.81 30.95 RPAT 18.35 13.99 31.17 Extra-ord. Items 0 0 NA APAT 18.35 13.99 31.17 CP 19.3 14.78 30.58

ECONOMIC FACTORS :
The Indian economy performed poorly in the Financial Year 2012-13.Faced with economic turbulence abroad and an unsupportive policy environment at home, industrial activity slowed steadily through the year, critical infrastructural projects stalled and private corporate investments lost much of their dynamism. A weak south-west monsoon added further stress. Food prices shot up, keeping inflation and interest rates high through most of the year, while rural incomes lost momentum. Consumer demand, as a result, slowed sharply, impacting business performance and profitability across the board. The country''s current account deficit widened significantly, putting severe pressure on the rupee. At the same time, with domestic economic activity slowing, Government revenues lost buoyancy, worsening the already weak state of Government finances. With the economy under severe pressure and rating agencies threatening a downgrade, the Government finally swung into action in the second half of the year, announcing a series of critical reforms. These measures have, undoubtedly, improved the extant economic environment in the country but deeper structural and administrative reforms are needed for the economy to regain momentum and fully realise its long term potential.

INDUSTRY FACTORS:
STRENGTS Large Domestic Market Sustainable Labor Cost advantage Government Incentives for Manufacturing Cost Strong Engineering skills in designing etc. WEAKNESS Low Labor productivity High interest costs & high overheads make the production uncompetitive Various forms of taxes push up the cost of production Low investment in Research & Development Infrastructure Bottleneck Weaknesses OPPORTUNITIES Heavy thrust on mining and construction activity Increase in the Income level Cut in excise duty Rising Rural demand

THREATS Rising Input costs Rising interest Rates Cut throat competition Threats

During the year under review, the GDP of the Indian economy witnessed a growth of around 5.6% with agriculture contributing about 2%. The Central and State Governments continue to give priority to agriculture through various subsidy schemes for power tillers and small tractors. This apart, banks continue to play a key role in promoting farm mechanization by providing loans for the tractor industry. Your company commands a significant market share in Maharashtra and Gujarat in the smaller HP tractors and sales in this niche market. However the growing market is presently witnessing intense competition from larger players. This segment is expected to do well in the coming years where your Company will continue to focus on. The Indian tractor market which is the largest in the world saw a marginal decline during the year. Tractor sales lost traction due to high interest rates and lower disposal income levels of farmers. This apart, deficient monsoons impacted volumes. The tractor industry sold 590672 units compared to 607658 units in the previous year with major players catering to various segments from 14HP to above 50HP. New players have entered the below 20HP segment to tap the market potential with low cost tractors for small and marginal farmers. The Agriculture sector is slated to register a positive growth of around 2% during 2013. Favourable policies of the government coupled with increase in timely credit availability provides opportunities for higher sales of farm equipment and better utilization of capacities. Various Government schemes such as Rashtriya Krishi Vikas Yojana (RKVY), National Food Security Mission and Prime Minister Rojgar Yojana (PMRY) have given thrust to the demand for mechanization. With labour becoming an ever increasing challenge in the farm sector, low cost mechanization will fuel growth for power tillers and low HP tractors are expected to be one of the growth drivers for 2013-14. FOLLOWING ARE THE CONSIDERABLE BENEFITS : Tractors: FDI to indirectly aid growth in demand for tractors in the medium term Indian tractor sector is the largest in the global tractor market by volume. Partial restoration of capital through waiver of agricultural loans in FY 2008-09, spike in commodity prices, improving credit availability in rural areas at low rates, newfound enthusiasm of Industrial houses in procuring food and groceries from farmers and supplying through posh malls across cities, towns and villages together have raised hopes that Indian agriculture is set to modernize at an accelerated pace. Besides this, tractors are also witnessing growing demand in industrial and construction activities wherein it is utilized as loader, trolley, in road construction etc. Roughly

35% to 40% of tractor demand is emerging from the commercial segment. The tractors are either utilized solely for commercial purpose or agriculture cum commercial purpose wherein tractors are used for agricultural purpose and then lent out for hiring by the farmers. This augurs well for the medium to long-term growth of the tractor demand in India. Tractor Industry to gain from the opening of FDI in multi retail The government of India has taken strong step ahead with opening up of the FDI in retail industry in September 2012. The opening of FDI in retail will result in giant retailers purchasing vegetables and fruits in bulk from the Indian farmers thereby increasing the cash in the hands of farmers. The farming industry is as such facing labour shortage on account of migration of people into non agricultural industries and high labour cost due to NREGA scheme which had been prime reason for the increased mechanization in farming i.e. use of tractors. Now, with the FDI in retail opened up, the farmers are likely to enjoy better pricing and demand for their produce and might even grow high value products to meet demand of foreign retailers. This would place more assured cash in the hand of farmers which in turn would aid healthy demand for tractors. Domestic Production As per Central Statistical Organization, the domestic tractor production was flat at 45025 tractors in Jul 2012 against 45034 tractors in July 2011. However it grew by 7% from 42039 tractors in June 2012. In period 4 months ended July 2012, the production fell by 6% to 167670 tractors on account of companies aligning their inventories in line with the demand.

RISKS AND CONCERNS

Credit flow to the agricultural sector, hardening of interest rates and timely monsoons play an important role with regard to demand for farm equipment. Given the seasonal nature of demand and the fluctuations in subsidy release, inventory build- up for power tillers takes place during some parts of the year. Another concern is the delay in collecting subsidy dues in a few States, which exposes our industry to high levels of credit risk and high receivables COMPANY FACTORS: The year under report was challenging for Company with growth slowing down in the agriculture sector impacting sales. The turnover for the year stood at, Rs.482 crores which is 10% lower than previous year figure of Rs. 530 crores. However the operating profit at Rs. 69 crs. was almost on par with the previous year due to higher realisation. EBIDTA margin was constant at 14% and the profit after tax is Rs. 48 crs as against Rs.50 crs. Power Tillers sold

during the year was 21231 units as against the previous years 26154 units while Tractor sales were lower at 6233 units compared to 7038 units during 2011-12. Company has also marketed 404 nos Rice Transplanters in the rice growing regions in India which is slowly shifting in favour of these machines due to shortage of labour. CURRENT YEAR OUTLOOK The Government is targeting over 4% growth for agriculture and there is clearly a need for improving agricultural productivity. Measures to accelerate reforms by the Government to increase agricultural production to ensure food security will augur well for our industry and we are cautiously optimistic for the current year. Though the competition is intensifying, there is considerable opportunity to increase tractor sales and your Company is poised to enhance its scale of operations and is revamping its sales and distribution network and efforts are on to build new markets. With an aim to strengthen its product portfolio and meet market demands the Company has recently launched a 22HP compact tractor with better features and aesthetics to gain market share. On the export front, the outlook for tractors though on a small base is encouraging and your Company has successfully homologated and obtained export certification to expand its global footprint. On the organization side, Management having strengthened Supply Chain is now in the process of reinforcing its marketing structure with an aim to focus on tractor growth. Various options are being studied to deploy key enablers in place to drive the company forward.

INVESTMENT RATIONALE
SALES

NET SALES
600 500 400 300 NET SALES 200 100 0

2006

1999

2000

2001

2002

2003

2004

2005

2007

2008

2009

2010

2011

2012

2013

The sales of the company has been increasing until last year when it fell. But VST Tillers Tractors reported net sales growth of 16% for June'13. Helped by lower raw material costs, OPM was up by 160 bps resulting in OP up by 27%. Other income up by 127% further resulted in PBIDT being up by 31%. With depreciation up by 20% and interest costs up by 38%, PBT was up by 31%. Finally, after 30% increase in tax provision, PAT for June'13 quarter was up by 31% y.o.y.

EPS

EPS
60 50 40 30 20 10 0 199920002001200220032004200520062007200820092010201120122013

The EPS of the company has always been increasing from the past 15 years. However it was reduced only last year due to reduction in 10% profits in the last year. PAT

60 50 40 30 20 10 0

PAT

199920002001200220032004200520062007200820092010201120122013

The PAT of the company has been increasing except for the last financial year in which it faced reduction in PAT by 10%.

FINANCIAL ANALYSIS

Financial Performance
Year End Equity Networth Enterprise Value Capital Employed Gross Block Sales Other Income PBIDT PBDT PBIT PBT RPAT APAT CP Rev. Earnings in FE Rev. Expenses in FE Book Value (Rs) EPS (Rs.) Dividend (%) Payout (%) 201303 8.64 243.73 273.15 264.07 112.9 482.69 2.1 74.38 72.98 71.02 69.62 48.57 48.56 51.93 15.8 21.22 282.09 54.69 90 16.47 0.04 2.5 6.49 4.38 50.73 15.41 15.12 10.06 29.2 21.68 3.67 19.33 201203 8.64 204.25 387.62 222.3 89.4 531.39 4.63 77.66 76.57 74.45 73.36 49.93 49.86 53.14 9.49 15.93 236.4 56.33 90 15.99 0.04 1.95 8.8 5.73 68.3 14.61 14.41 9.4 38.46 27.16 4.99 25.03 201103 8.64 163.36 361.12 164.83 83.26 427.94 4.04 74.29 73.31 72.02 71.04 46.19 46.22 48.46 12.56 12.28 189.07 52 90 17.32 0.04 2.06 8.62 6.6 73.49 17.36 17.13 10.79 47.72 31.9 4.86 29.44 201003 8.64 126.21 259.04 137.01 78.74 344.87 2.86 65.36 64.39 62.77 61.8 42.33 42.4 44.92 10.22 9.92 146.08 47.74 75 15.71 0.08 2.12 7.21 6.65 64.71 18.95 18.67 12.27 53.37 38.9 3.96 38.02 200903 5.76 91.44 63.27 98.57 68.55 274.86 4.86 47.76 46.95 44.95 44.14 28.91 29.04 31.72 15.17 8.95 158.75 48.92 75 15.33 0.09 1.87 6.49 8.26 55.49 17.38 17.08 10.52 51.96 36.36 1.32 35.31

Ratio Analysis
Debt-Equity Current Ratio Invtry Turnover Debtors Turnover Interest Cover PBIDTM (%) PBDTM (%) APATM (%) ROCE (%) RONW (%) EV/EBIDTA Net Worth

Rate of Growth (%)

Sales PAT M Cap Price Earning (P/E) Price to Book Value ( P/BV) Price/Cash EPS (P/CEPS) EV/EBIDTA Market Cap/Sales Cash and Cash Equivalents at Beginning of the year Net Cash from Operating Activities Net Cash Used in Investing Activities Net Cash Used in Financing Activities Net Inc/(Dec) in Cash and Cash Equivalent Cash and Cash Equivalents at End of the year Year

-9.16 -2.72 -21.97 6.48 1.26 6.05 3.67 0.63 19.85

24.17 8.1 2.72 8.06 1.92 7.56 4.99 0.74 20.51

24.09 9.12 45.08 8.5 2.34 8.09 4.86 0.89 14.99

25.47 46.42 251.52 6.38 2.09 6 3.96 0.76 18.74

45.14 100.76 5.05 2.66 0.82 2.42 1.32 0.27 16.97

VALUATION RATIOS

Cash Flow Summary

49.91

-9.56

52.23

15.16

17.88

-10.91

2.77

-36.17

-16.88

-11.45

-26.26

6.13

-10.54

-2.03

-4.66

12.74

-0.66

5.52

-3.75

1.77

32.59

19.85

20.51

14.99

18.74

2013

2012

2011

2010

2009

VALUATION
For the year ended March 2013, the company's operating income fell by 9% to Rs 481.66 crore. However OPM was up by 140 bps to 15%. Operating profit stood stagnant at Rs 72.30 crore. In terms of cost, as % to sales net stock adjusted, raw material cost as a % to net sales net of stock adjustments, for the year FY 13 reduced by 300 bps to 67.8%. On the other hand, the other expenditure and staff cost grew by 60 bps to 10.1% and 50 bps to 5.5% respectively.

The other income for FY 13 was down by 57% to Rs 2.10 crore while the interest cost was up by 33% to Rs 1.28 crore. However marginal rise in depreciation cost by 4% to Rs 3.35 crore partially cushioned the fall in PBT. PBT fell by 4% to Rs 69.72 crore. Fall in effective tax rate by 200 bps restricted the fall in net profit and the same fell by 2% to Rs 48.67 crore. The promoters' % of share holding stands at 53.85% as on June'13 and none of the shares are pledged. VST is in general a highly volatile stock and witnesses sharp swings in each direction. The share price has been found as 417.5. Therefore the recommendation is to buy the stock. However in case the market turns extremely bearish, the stock can witness a fall to the levels of Rs 330-350 i.e. a downside of 15-20. As per Fundamental & Technical Analysis I would recommend to buy this stock Target price- 418