VST Tillers

In the first decade of the 21st century, the population of the world produced more economic output than the first nineteen centuries combined. How did we achieve this tremendous feat? In the last two centuries we learnt to augment muscle power with efficient energy sources like oil, natural gas, and atoms. We invented new machines which used these energy sources to get more work done in less time.

Machines and oil played a huge role in improving agricultural productivity. In 1790 around 90% of American population was engaged in farming. As of today only 2% of the population does farming. And it produces more output with less resources as 95% of American farms are mechanized. From the chart given below you can see that developing nations like India and China employs more people in agriculture as their farms are less mechanized.


Indian farmers know that mechanizing the farm increases productivity. In spite of that, from 2001 to 2010, the total power usage in farms grew at a minuscule rate of 2.32%. Why is that? Farm mechanization requires a minimum operating scale. Agricultural land for 84% of our farmers are small. And the output produced from these farms will not cover the cost of big agricultural equipments. Also majority of the farmers are poor and they don’t have access to credit. Farmers needs two things to mechanize their farms at a faster rate. They are (1) small and cost effective agricultural equipments (2) access to credit. VST Tillers solves the first problem by manufacturing cost effective agricultural equipments.


1. Business

VST Tillers Tractors Limited was incorporated in the year 1967 as a joint venture with Mitsubishi Heavy Industries Limited, Japan. The company is now the largest manufacturer of power tillers in India. It also sells tractors, rice transplanters, and spares. Around 98% of its revenue comes from India and the remaining 2% comes from exports. It has two factories, one in White Field, Karnataka which manufactures tillers and the other in Hosur, Tamil Nadu which manufactures tractors.


1.1 Power Tillers

A power tiller is a low cost machine which can be used instead of a tractor. They are very effective in areas having high concentration of small farmers with fragmented land holdings. Power tillers costs Rs 1.5 lakhs which is 50% less than the price of a tractor. There are other advantages of power tillers which you can read here. The Power Tiller industry is growing at around 12% per annum. VST Tillers continues to maintain its lead and in 2014 it had a market share of 47%. Power Tillers imported from China by many smaller players have a combined market share of around 25%.


Majority of the small farmers have money only to meet their day-to-day needs. Paying Rs 1.5 lakhs for a power tiller is an ordeal task. How can he afford this much money? The answer is government subsidies. And this is the single largest factor driving tiller sales in India. The quantum of subsidy depends on the state government. In Tamil Nadu, the state I come from, tiller subsidy is limited to Rs 45,000. The farmer is expected to put a down payment of 10%. And the balance comes from bank loan which again is subsidized at a very low rate.

If there’s so much of subsidy then how come VST Tillers increased the price of tiller at a CAGR of 4%? It can’t increase the price at its whims and fancies. Every year it has to get an approval from all the states before increasing the price. Anytime during the year if raw materials goes up in price then it has to take the hit. Also dealing with the government creates a lot of processing overheads. This has delayed the release of subsidies and put pressure on its working capital management. This is evident from its cash-conversion-cycle.


On the financial front, your Company has adopted a disciplined approach towards managing liquidity though delays in realization of government subsidies have significantly pushed up the receivables and working capital. – 2012 Annual Report

A farmer should sell his produce above his operating and financing cost so that he can feed his family. If that doesn’t happen then he is in trouble. Once again government comes to his rescue by providing minimum support price for his produce. From all this we can conclude that success of VST Tillers depends heavily on government’s intervention.

1.2 Tractors

In India, tractors with low horse power (HP) is under penetrated. Considering that 84% of farmers have small farms, there is a significant opportunity in this space. In order to tap this opportunity, the company manufactures 18.5 HP and 22 HP tractors and continues to maintain a significant market share in Maharashtra and Gujarat. On 25th April 2014, its new Hosur plant opened for operations which can produce 36,000 tractors per annum. For tractors there are no subsidies given by the government. In 2014 tractor industry sold 634,151 tractors of which VST sold 7,452 (1.18%) tractors. So there is a lot of room for VST to grow in less than 20 HP segment. But it’s not easy as it has to compete with other organized players.


Strong underlying demand in the less than 20 HP category has prompted the entry of organized players like M&M; a segment which is currently catered to largely by un-organized players. Accordingly, sale of less than 20 HP tractors saw strong 25.7% YoY growth in 9mFY12; albeit on a small base. With roughly 39% of the area under cultivation contributed by small and marginal farmers (less that 2 hectare land holding) the opportunity in this space are significant; more so in light of very low tractor penetration at present. Also with scarcity of farm labour and rising cost of bullock carts, the trend of ownership of small and less expensive tractors by marginal farmers is catching up. Apart from lower initial costs, these tractors deliver better fuel efficiency when compared to their higher powered cousins, making it viable for small farmers to upgrade from a bullock cart to a tractor. While currently M&M and VST tillers are the only two large players that have presence in this sub Rs 2 lakh tractor market others likes ITL and Escorts are expected to enter this segment soon. However, restricted application to soft soil conditions, competition from second hand market of higher HP tractors, and limited credit worthiness of marginal farmers are some of the factors that shall also influence the growth in the sub 20 HP tractor market. – ICRA 2012 Report

1.3 Is this a good business?

If I ask you to look at a single metric to tell if a business is good or not, which metric would you look at? Without any doubt I would look at return on capital employed. VST Tillers cranked out an average return on capital of around 40% which is fantastic. It achieved this by maintaing a high asset turn over and a decent operating margins. From the table and chart we can see that (1) agriculture is a cyclical business and it’s heavily dependent on monsoon and government intervention; look at the chart with several ups & downs (2) accounts receivable and inventory can build up quickly; look at 2012 and 2015 (3) increase in cost of raw materials can impact margins; look at 2012.


How could VST generate such high returns on capital by competing with big players like Mahindra & Mahindra which has 66x more sales? If we ask Michael Porter this question what would he tell? He would tell that VST is doing something unique. While other players were busy solving the problems of farmers with big farms, VST was solving the problems of farmers with small farms. By partnering with Mitsubishi it developed expertise in tiller manufacturing. It slowly built its dealer network (335 dealers) in Southern, Western, and North-Eastern India where farms are small.


The key to competitive success—for businesses and nonprofits alike—lies in an organization’s ability to create unique value. Porter’s prescription: aim to be unique, not best. Creating value, not beating rivals, is at the heart of competition. – Understanding Michael Porter

By doing this over time VST built a loyal customer base and dealer network to support them. This gave it a first mover advantage. It reused its dealer network to sell other products like tractors and rice transplanters. On top of this dealing with delays in government subsidies is not easy. All of this enabled VST to build a castle with piranhas and crocodiles. And this deters competition from taking away its market share.

2. Management

The first test for a good management is conservatism. Anyone can generate high returns on equity by levering the balance sheet. From the chart we can see that the management generated an excellent return on equity of 26.70% without much debt. It’s hard to run a cyclical business without debt. And the management deserves some credit for that.


The second test for a good management is to see what they did with cash generated from operations. In the last ten years it generated Rs 301.53 crores from operations and used it sensibly to (1) setup a new factory in hosur to manufacture more tractors (2) repay its debt and keep the balance sheet clean (3) pay dividends (4) strengthen the balance sheet by holding treasury assets which is used for managing working capital during adverse conditions.


The third test for a good management is to look at how they compensate themselves. The top three executives in aggregate received around Rs 1.2 crores as remuneration. This represents around 1% of pre-tax operating profit which is fantastic. In FY2014 the company had a related party transactions of Rs 5.79 crores. On a sale of Rs 624 crores related party transactions constitutes less than 1%. Overall I see that the management is able, conservative, honest, and share holder friendly.


3. Valuation

Before valuing the business let’s understand the theme on which the valuation is going to hinge on. Mechanization of Indian agriculture is very low compared to other countries. Land is a limited resource and to feed our growing population we need to improve the yield. The only way to improve the yield is to use machineries. If you read this presentation you will understand why companies like VST has a lot of room for growth.


Around 55% of our population is engaged in agriculture and they produce only 16% of GDP. This is one of the main reasons why so many farmers are poor. In order to help the farmers, government schemes like MNREGA was introduced. This scheme guarantees job for a rural citizen for 100 days in a year. This in turn created labor shortage in farming. And this placed more need for mechanization. The theme on which our valuation is going to hinge on are (1) under penetration of farm mechanization in smaller farms (2) labor shortage (3) government subsidies (4) loyal customers and strong dealer network. These are the four legs of the stool on which VST is sitting on. If anyone of them is disturbed then it will destabilize its business.

Agriculture equipment is a cyclical business and it’s heavily dependent on subsidies and monsoon. In FY2015 VST had a sales of Rs 550 crores compared to FY2014 sales of Rs 625 crores. Sales was down by 12% due to delays in the release of subsidies and poor monsoon. These issues are temporary in nature and the long term growth story is intact. As the long term sales trend is up I am going to use FY2014 sales of Rs 625 crores for valuation.

In FY2014 it had an operating profit margin of 20.46%. But that’s an aberration. The company got benefited from steady raw material costs and higher realization on products during FY2014. The normalized operating profit margin should be around 17%. Applying 17% to Rs 625 crores sales we get a pre-tax operating profit of Rs 106 crores. But I can’t blindly use that number for valuation. Why is that? Read what Buffett wrote about valuation and focus on the words marked in bold.

A few years ago the conventional wisdom held that a newspaper, television or magazine property would forever increase its earnings at 6% or so annually and would do so without the employment of additional capital, for the reason that depreciation charges would roughly match capital expenditures and working capital requirements would be minor. Therefore, reported earnings (before amortization of intangibles) were also freely-distributable earnings, which meant that ownership of a media property could be construed as akin to owning a perpetual annuity set to grow at 6% a year. Say, next, that a discount rate of 10% was used to determine the present value of that earnings stream. One could then calculate that it was appropriate to pay a whopping $25 million for a property with current after-tax earnings of $1 million. – 1991 shareholders letter

vst-cfo-patFrom the above chart we can see that VST’s working capital requirement is not minor. So I am going to take a working capital charge of 10% on its pretax operating profit of Rs 106 crores. After this adjustment its pretax operating profit will be Rs 95.4 crores. Applying a 10% cost-of-capital VST zero growth valuation should be Rs 954 crores. As of this writing its total market capitalization is Rs 1,247 crores.

At this price Mr. Market is expecting VST to grow at 2.5% forever. I believe that VST can definitely grow more than 2.5% and the stock appears to be undervalued. VST has around Rs 104 crores as treasury assets and I am not using it in my valuation. The reason is because it might need these treasury assets to fund any shortfall in working capital management.

I know that the stock is undervalued. But I want to know how much return will I get if I buy the stock at the current price. In order to find this out I am going to use the technique discussed here. In the last ten years the company grew its sales and operating profits at 19% and 27%. Let us assume that for the next ten years it will grew its sales at an industry average of 15%. Using this conservative estimate the expected return comes to 13.23%.


As of this writing I don’t own any shares of VST Tillers. Click here to download the financial data I used to write this post. If you read this post along with John Deere you will learn a lot about agriculture equipment business. Disclaimer: This is not a recommendation to Buy-Sell-Hold. And I am not a SEBI registered analyst.

60 thoughts on “VST Tillers

  1. Jana,

    Your posts are always a treat to read. They are so good that I feel like reading them multiple times.
    Thank you for your blogging efforts.

  2. Jana, thanks for the post. If i may ask why are you using pretax operating profit to calculate the valuation rather than net profit? is it because you are using 10% cost of capital which would be before tax rate?

    • Jagan,

      Thanks. I have broken down the valuation into two parts.

      (1) Is to check at what is my yield at pretax operating profit so that I can compare it with fixed deposit whose return is also pretax.

      (2) on the net income I see how much would I have make if I hold the stock for 10 years at an assumed growth rate and profit margins.


      • Hey Jana,

        Couple of things re. your valuation method:

        1. You’ve written:

        “After this adjustment its pretax operating profit will be Rs 95.4 crores. Applying a 10% cost-of-capital VST zero growth valuation should be Rs 954 crores. As of this writing its total market capitalization is Rs 1,247 crores. At this price Mr. Market is expecting VST to grow at 2.5% forever. I believe that VST can definitely grow more than 2.5% and the stock appears to be undervalued.”

        – Why would you calculate the present value of the business while including the government’s share (tax)?
        – How can you compare this mixture-valuation to the market capitalization which only indicates the value for the shareholders?

        If you wish to compare the fixed deposit upside, which is given, with the business upside, I think you should do just that – compare the fixed deposit gross yield (before withholding tax) with the business’ upside (intrinsic valuation / market cap. – 1).

        2. You’ve also written:

        “From the above chart we can see that VST’s working capital requirement is not minor. So I am going to take a working capital charge of 10% on its pretax operating profit of Rs 106 crores.”

        As you’ve calculated VST’s valuation without any growth, I don’t see why would you make a fixed deduction of 10% of PBT. That would imply that in order for VST to earn even 90% of it’s latest PBT, it would need to invest additional 10% of it in w/c. I think it may prove to be too conservative, especially after taking into account your ag. equipment market analysis.

        3. Last thing – at the end of the write-up I think you wished to calculate the CAGR of total return of investing in VST. But as it is, you’re 13.23% CAGR return implies that for the next 10 years VST won’t be able to return any cash to its shareholders because of its need to put all of its earnings back into the business as incremental capital. If you wish to take into account in your total return CAGR calculation the earnings of VST along those 10 years, you should discount their values and add them, whether to 2025 valuation figure, or as free cash flows along the way.

        Kind regards,


      • Michael,

        Thanks for your comments

        (1) Agreed that profit before tax includes government share. But the same is true for fixed deposit which includes government share. I do this step to get a feel for the yield one would sign up for.

        (2) Since VST depends on timely release of government subsidies it has a need to build up inventory and accounts receivable. To compensate for that I took a 10% charge. I agree that it’s conservative and the reasoning is cyclical.

        (3) You’re right. My calculations took only the terminal value and it didn’t account for free cash flows. That’s a mistake on my part and will address it from the next post. Even missing a lot of free cash flows the return seems to be reasonable provided the company can maintain a decent return on capital.


      • Jana,

        Forgot to mention how I keep enjoying reading your writings and learn from each and every post. So do keep up with the excellent work!

        Re. your saying that:

        “(1) Agreed that profit before tax includes government share. But the same is true for fixed deposit which includes government share. I do this step to get a feel for the yield one would sign up for.”

        Keep in mind we are talking about two different tax schemes.
        On one hand, for corporations we have 2 levels of taxation – corporate tax at the level of the corporation, and capital gains tax at the level of the shareholder.
        On the other hand, for fixed deposits we have only one level of taxation, the one at the individual investor level.
        Therefore, if we want to compare apples to apples, we should deduct the corporate tax from the corporation’s earnings, and then make the comparison.

        In any case, i don’t think it’s permissible to compare present value of pretax profits’ discounted cashflows, which takes into consideration the government’s share, with mkt. cap. which in its entirety is attributable to the shareholders. You will get distorted conclusions.

        Kind regards,


      • Michael,

        Thanks and you have a valid point. I need to think more about this.


  3. As always very well written and easy to understand Jana. Congrats. I have some points regarding the topic:
    1. Whats your perspective to use 10% discount rate ?
    2. How do you see Mahindra’s buying stake in Mitsubishi Agricultural Machinery, can it in any way
    hinder technology transfer from Mitsubishi to VST ? and if yes is VST prepared for this?
    3. Going forward how do you see margins in sub-25 HP tractor segment in which VST is present as
    in the latest concall of Escorts they have mentioned that this segment is the no margin story,
    Escorts is currently catering this segment through 3rd party manufacturing just to pull customers
    to its dealerships and even some player have vacant this segment all together.

    • Brijesh,

      Thanks for your comments.

      (1) To get a feel for the yield I get at the current price, I compare it with fixed deposit rate. Currently it is at 8-9%. So I round it to 10%.

      (2) Thanks for pointing this out. I need to dig into the details.

      (3) Gross margins have been steady for the last 10 years and operating margins have been improving. And with 30+% of sales coming from <25 HP tractors I don't see this as a problem.


  4. Wonderful write up, I am fascinated. Can you tell us why the accts payable is so tiny? Is there a business reason that requires them to pay so fast? For example DE runs A/P at about 8-10% of revenues, A/R about half of that. Was it because inventories have been aging and they were obligated to pay, while at the same time slowing production?

    Any company that can grow revenues 5x in 10 years has my attention! Since I am unfamiliar with Indian currency, can you translate the sales and market cap to $US please?

    • Mary,

      Sales of tillers depends on the timely release of government subsidies. And everything depends on timely monsoon + minimum support price. If there are delays then inventory + accounts receivable builds up. And the company can’t delay its payment on accounts payable. This is the reason why cash-conversion-cycle shoots up during adverse times.

      At the current exchange rate, sales comes to $98 million and market capitalization comes to $195 million.


  5. Hi Jana,

    I like your posts. But dont you think that the business is lot to depend on the Government particularly to avail the subsidies. We know how files move in govt dept’s wen it comes to claiming refund/availing subsidies.

    • Ram,

      Yes government subsidies is one of the key risks. But think about it from the politicians angle. Farmers are the biggest vote bank for them. Why would they screw it by revoking/reducing the subsidies?


      • Just look to current situation in Brazil where they also have very large ag subsidies and ignored signals in the economy and kept govt policies that reached out to various vote banks to stay in power. Now in a drastically declining economy govt is being accused of dragging the econ down and may not survive…along with their policies.

  6. Hi jana, very informative analysis. But I am still not clear about the 10% discount. Pls throw some more light on it. Regards, Manek

    • Manek,

      Thanks. I have broken down the valuation into two parts.

      (1) Is to check at what is my yield at pretax operating profit so that I can compare it with fixed deposit whose return is also pretax. Current FD rates are between 8-9% and I used 10%.

      (2) on the net income I see how much would I have make if I hold the stock for 10 years at an assumed growth rate and profit margins.


  7. Jana, good posts – I enjoy reading them. However, I think small tillers are an industry that is going to get disrupted with the entry of mahindra and other tractor guys. When large tractors are struggling for growth, these companies will have to innovate and get into this hitherto niche.

    So, net net, I do not see operating margins of 17% sustain going forward because of “creative destruction” of the industry – similar to what happened with maruti’s small cars – they got hit from all directions by ford, hyundai, tata etc. Of course, maruti survived and flourished by their small car margins came down – which they intelligently compensated by getting into MUV’s like ertiga and ciaz and into diesel engines (where margins are better).

    Will VST be able to do the same ? I do not know – my sense is that they are handicapped by technology

    Discl : bought vst at 300 and exited at Rs. 1500; waiting and watching now.

    • Varadha,

      Valid points. Tractors with less than 25 horse power will face definite competition.
      I believe the key is to capture market share, loyal customers, and strong dealer network.
      But I don’t know for sure who will lead the small tractor market.


  8. It is a nice article. The discount rate can be 12% ( 8% 10 yr bond plus CRP). But the main problem in your valuation or rather any kind of valuation is the visibility. One cannot have a 10 years visibility in this kind of business. In that case, your valuation goes for a toss. Another problem is exit mutiple 15 is very high for this kind of business.

    • Sethuraman,

      Thanks for the comments. Couple of questions (1) why do you think one can’t have visibility for 10 years (2) what should be a fair multiple and why?


      • Dear Vembu,

        The way a company has grown in the past gives an idea about the market size and its sustainability. The 5% growth gives an indication that either market size is less or its penetration is slow. VST is a cyclical business. Monsoon dependent, Govt dependent. Hence, the visibility is questioned . A cyclical business you need catch at the bottom p/e and it is very difficult. because of the market p/e expansion, VST 52 week low p/e comes to 16.92. I would not prefer a multiple more than half of 16.92.

  9. HI
    tell me how much time do you spend before you conclude your analysis..Im impressed with the various documents you have reffered to , indicating the extensive research done..
    also where do you manage to get all the industry related data ..understand some of the company related data will be in the annual reports..but do you access any databse in particular ?

    • Raj,

      Annual reports, investor presentation, government websites, and books I have read.
      I don’t have access to any other databases.


      • you do join the dots very well !! you didnt answer though how much time do you take on average for collecting all material/ analysing etc before you blog ?

  10. Dear Jana,

    What about the Moat in this business. I find that there are few companies like M& M and Greaves Cotton. What is your view on competition among companies

    • Ram,

      if there’s a moat then it should come from gaining market share, loyal customers and dealer network.
      In tractors with horse power less than 25 M & M is there. So there is definite competition in this space.


  11. Dear Vembu,

    Is 3.23% differential is enough for a equity risk ( FD frozen @10% Vs 13.23% CAGR).
    Valuing a business is a tough task . Owners earning as recommended by Mr Buffet is only for a stable business like Colgate, Coco cola,HLL, Gillette,etc. Just let me know applying DCF model for this kind of business – Is it right.

    When the past sales growth ( 5 yrs) is just 5% , how can we take 15%. I think we need to go beyond financial modelling or for that matter any finance numbers to value a business. What I mean we need to see the market size and it can be easily understood like we have for Page, Kitex, AIAEng,etc. When we understand the market size, financial numbers just follow for confirmation.

    And again there is a p/e expansion and p/e contraction period in every stock in line with the overall market. How will you anticipate this?.

    In case of VST, it is very difficult for me to fathom the market size apart from there are so many uncertainties.

    Mr Buffet is successful because a big investor he had access to all the info and it was very easy for him to understand and plot the numbers. We do not have that luxury as a retail investor.

    Myself breaking my head for so many years for a right valuation but no success. I became successful after I went after the market size. I bought Page in 2009 at a ridicule valuation and so is Kitex.

    Understanding the market size and its penetration is much more important than any other data. Whatever done after that is just confirmation that the investee company is doing right things in marketing, finance, honesty, corporate governance,etc and keep it forever unless any of these parameter changes or saturation.

    • Sethu,

      Thanks a lot and your points are super useful.

      Agreed market size and share are very important metrics to use while analyzing a business.

      VST business is prone to cycles and looking at a five year period with a high-low sales will be misleading. If you take 2014 sales then the CAGR jumps to 12.62%. And tractor sales have grown at 19.46%.

      VST is having a commanding market share of 47% in tillers. And the management believes to generate 12% growth in tillers and 40% growth (new tractor factory is in operation only from last year) in tractors. Weighted proportional to sales growth should come to 20%. To keep it conservative I kept the growth rate to 15%.

      The key questions to ask are (1) can they maintain a decent market share in tillers (2) can they sell more tractors and gain market share (3) can the maintain their margins and decent returns on capital. Until now they have been doing this. And I don’t know for sure if they will continue to do this.


      • Is it possible to get data like this.

        Tillers 47% : This is a good number as it indicates/confirms shift towards mechanization.As I understand tillers are mainly used by small farms. Hence, is it possible to get no of small farms or at least acreage where tillers can be used profitably by the farmer. ( labour vs power tiller , cost and availability).Once we are able to get the total market size, we can drill down other aspects like present penetration, future penetration after analyzing competition and sustainability. In future, small farms will not be monsoon dependent and this is a very important point to consider.

        Always, go for a business where the product life is low like inner wear, children wear, grinding media,etc. In this case, we need to understand the life (or extended life by the farmer) of a tractor and a tiller.

        Tractors : we need to understand how the 40% growth is going to come.

        I know it is very difficult to find answers for all the above and pardon me for asking questions. This is the sole reason where i would prefer a business where as a layman we can see the market size. ( In Tamil Ullangai Nellikani pola). All these info will be available with the Company but as a retail investor we cannot get but a big investor like p/e funds, Mr Warren Buffet can get. Then it is easier to make judgement and invest. Our case is like 7 Blindmen and Elephant story.

      • Hi Sethu,

        Thanks for asking tough questions and I really like them.

        VST Tillers sold 27,252 tillers and 7,452 tractors in 2014. This is the excerpt I got from NABARD [nabard.org/english/powertiller.aspx].

        If in the situation described above power tillers are put to use, it is anticipated that there would be a vast potential for the use of power tiller. If Japan can boast up putting 6 million and China 1.9 million power tillers in use in their farms where cultivated areas are just 5.27 and 100 million hectares respectively, it should not be difficult in India to increase power tiller use where cultivated land is 140 million hectares. It must be added that the average holding size of both these countries are similar to India.

        Of the 140 million hectares small and marginal farmers take is around 39% and it comes to 54.6 million hectares. In ten years if volume growth is 12% for tillers then the total tillers will sold will be 84,640 tillers. This is still a drop in an ocean compared to what other countries are using. It’s not hard to see the same pattern in tractors as well. I am not worried about their potential to grow as the base is too low and addressable market is too big. And you should read this presentation from Ministry of Agriculture http://goo.gl/ugzbJA and ICRA 2012 report [http://goo.gl/n0YtTz]. So getting the numbers is not hard.

        But what is hard is to find answers to questions given below. And I am still pondering over them.

        (1) What will happen if government stops the subsidies given to the farmers. Will they do it?

        (2) Can the import of machineries from China impact VST. What will happen if excise duty on these goods are relaxed?

        (3) Will VST be able to grow with other organized players like M & M. How strong with there dealer network be?

        (4) Will they be able to retain their operating margins of 17% and high asset turn over? Will the players behave nicely or would they compete in a price war.

        Also I am not recommending this stock. I am sharing what I learnt while reading about this business. And one should use their judgement to take a position.


  12. Hello,
    First of all I would like you to congratulate on the wonderful analysis done by you. It is always a pleasure reading and studying your analysis which must have taken hours of hard work by you. Regarding VST, I have a couple of queries.
    1) You have mentioned that share of VST is around 45% in Tillers segment while those of Chinese and other imported ones are around 25%, I would like to know what is basically the cost difference in purchasing a tiller from VST as compared to a Chinese made. Is it significant enough to worry about losing market share in future ?
    2) As you mentioned the company is depended on Government subsidies, is it possible if the company might need Government assistance in future to raise import duties of tillers that are getting imported from China or other low price manufacturing countries.

    The agri-machinery sector looks exciting considering a very low base that we have right now which presents a tremendous opportunity to grow. I personally believe if the states give proper incentives towards mechanization then there is an opportunity for 2-3 or maybe more players to see a nice growth as we have such a huge market that it can absorb these players. Although VST has like a first mover advantage and maybe loyalty towards its consumers, but one must also keep in mind the goodwill attached with brands like Tata and Mahindra.

    • JB,

      These are great questions.

      (1) From what I have read from other sources imports from China are 10-15% cheaper. In spite of that VST market share has been growing. I am sure over time their overall market share will come down. And the differentiation they have is strong dealer network which will result in better customer service.

      (2) I don’t know what will happen to Government policies. And this one danger and the only hope which VST has is strong dealer network.

      (3) Agreed. The opportunity size in low power tractor is huge and the first mover has definite advantage. If the players behave nicely then everyone can have a share of profits. But only time will tell how this will play out.


  13. Sandip P

    Very excellent analysis!!!

    Following are my comments on market –
    As I know tractor industry, VST tractors are more suitable for Interculture of sugarcane& cotton & for Vineyard. This is because of width of tractor. Main market is in Maharashtra, Gujarat & Tamilnadu.

    The size of market for tractor like VST is around 8000-10000 nos annually. Main competitors are Kubota, Sonalika& Force motors. Kubota has done very excellent in this segment . It sold around 5000 nos.annually. Market feedback for VST is issue of availability of spare parts. VST tractor are available in 18 HP & 21 HP. This is also challenge from seeing latest trend of having higher HP requirement in vineyard.

    VST power tillers are mainly used in puddling application by small & marginal farmers in south. No doubt, they are first entrants, they have monopoly for power tillers. Government subsidy plays a major role in this segment. Farmers also hires tractors in puddling which is cost effective & work happen in less time.

    Since every farmer has aspiration to posses tractor once he has sufficient money, after using Power tillers, farmers shift to buy tractor in 31 to 40 hp segment which is entry segment.

    • Sandip,

      Thanks for your detailed response and they are very valuable.


  14. Dear Jana,

    A good analysis. It gives d reason for slow mechanisation of Indian Farms, that is ‘ delayed subsidies
    from the Govt. & Farmer’s uneasy access to credit, to avail the required farm equipments’.



  15. Some thoughts:

    The renting of tractor on hourly basis is very much common in villages. You make a phone call to a person who owns the tractor, you will see the tractor in your land in next two hours. Mostly the guy who rents would have 2 or 3 tractors in his custody and a few I know don’t have a farm.

    To the farmer it’s better to rent than buying his own tractor:

    a. The cost of tractor would come around 4-5 lacs (tractor + trailer to carry goods + plough + accessories). It’s easier to rent a vehicle then to own it because you are going to plough it, may be twice an year.

    b. In villages, normally the farmer doesn’t know to drive a tractor. The driver to operate the tractor is also too expensive. These days if some one know to drive a tractor, they will go as car driver instead of sweating in the farm or they may very well get more wages under that guy who operates a renting business than farm owner. These days bank loans are available, so he may very well buy his own tractor and start renting.

    I don’t have to mention the maintenance cost and Insurance cost.

    So it’s actually advantageous for small farmers to rent. Since there is also a competition in renting business,the rent is also kept in check. For this sole reason, Mahindra’s highest HP (575-DI as I last know) tractors gets bought. A little more price for higher HP’s will profit the buyer in terms of wear and tear as he uses them heavily for rent purposes.

    That’s my opinion on tractors. These farmers are more likely to buy a car before buying a tractor.

    The above comment might be irrelevant to this article, but just thought of sharing the psychology of farmer in terms of owning vs renting. Yes, a small farmer needs triller, but would he buy it or rent the service using M&M tractor? I don’t know. Based on the past record of VST Trillers, we can assume that there is a market ( Again, I’m basing my thoughts on my region).

    Having said that, I think every one would buy equipments such as rice planter or seed sower. I would think its as a question of when than a question of why.

    A positive thing about triller is that they don’t require a drivers license or an insurance premium per year. There are also few application like trenching that triller do best.

    I’m also looking forward to see innovations like this, http://youtu.be/lE5ErnEmI7E

    • Ragu,

      Thanks for your valuable comments and I completely agree with your points. Nabard.org vision is to develop entrepreneurship so that renting of agricultural equipments becomes the norm.


  16. Hi Jana,

    Very good analysis.

    Can i use the same method for calculating estimated profits/mcap for all companies except NBFC,Banks.


    • Bharath,

      Thanks. Yes you can use this method for valuing non lending companies.


  17. Hi Jana,

    Thanks for all your articles. They have been very helpful. I had a talk with a VST dealer based in Gujarat some days back. This is what he said:

    – Chinese tillers cost around Rs60,000 compared to Rs1,50,000 for VST (1,05,000 after subsidy)
    – Honda have come out with tillers over the last 2-3 years which have been in good demand.
    – Quality of VST tillers is better than the rest but price plays a crucial role in making the choice.
    – Disbursement of subsidies much better in Gujarat over the last few years but can’t say the same about other states.
    – Subsidies are also distributed under National Horticulture Board but not in a big way.
    – General preference of small tractors due to labour shortage etc.
    – Major players in tractors include Mitsubishi, Mahindra, Sonalika and Kubota.
    – Much more interest in tillers in South Gujarat than in North Gujarat (don’t seem to remember why). He said that the ratio of tiller to tractor sales is 1:50 in North Gujarat.
    – Very good management.

    Hope this helps.



  18. Focus on dollar sales of VST powertillers is also misleading. Also no discussion on the fact that VST also imports and sells high numbers of Chinese made Dragon Brand. Even more interesting I’ve read reports that gave yearly sales figures of what we call 2-wheel tractors (2WTs)or power tillers that gave total numbers of 2WTs sales climbing from 15,000 in 2004 to over 50,000 in 2011, an increase of over 20% per year. The reports said that VST had nearly 50 % of the total, But again what percentage of sales is imported Dragon brand and what percent is Mitsubishi Shakti India manufactured brand.

    • Thanks for your comments. The dollar figures were given in the comment section as one of the readers from US wanted to get a feel in dollars. I don’t have the exact split between Dragon and own manufactured equipments and I vaguely remember that Dragon brands constitute very low percentage of total sales.


      • My experience is opposite, and that Dragon’s sales are quite high. Talking with folks in Bihar I heard that percentage of Dragon is high (how high I don’t know) and is sold year around with and without subsidy and that Mitsubishi brand is sold only in subsidy season due to its higher price. From my few tours in Odisha, the state with highest 2WT sales (15,000 / yr) I see mostly Chinese made 2WTs in markets and fields including Dragon, Greaves, Shrachi etc, and much fewer the Mitsubishi or Kubota.

      • You’ll see a lot of Mitsubishi Tillers in southern India. And their Tractors will be seen in Maharashtra and Gujarat.


      • Jana and All, I am just now getting through the initial posting and comments and really appreciate them all. Price point has been a fascinating subject for me. As mentioned above the Chinese factory gate price for the 2WTs is around 60,000, Still, Indian importers including VST put the price at around 1,30,000 for the Chinese 2WTs. Jana Whereas importers next door in Bangladesh and Nepal put the prices at 75,000 (sales in Nepal approx 3-4000 2WTs / yr and Bangladesh about 70-80,000 2WT / yr). When asked in 2003 ( http://www.naef-nepal.org/Report%20Kolkata%20Meeting%20June%2003.pdf ) about why there is such a disparity between factory gate and final retail price and after some hemming and hawing about extra costs and tariffs (they were only 24 % at the time) etc, nearly everyone said the same thing…we do it because we can. In the last 3 years since I again started advising ag programs in India I put this as a challenge to my Indian friends and colleagues that in a nation of folks who prides themselves on getting the best price for x, y z, how is it they remain complacent with this pricing strategy? Also the figures I have for amount and use of 2WTs in China are much higher closer to 10 M. The numbers are also relatively high in Thailand (1.5 M) Vietnam ( 7,00,000 ) and even Sri Lanka 2,00,000,

        Also a better understanding of nature and use of tractors in general is greatly needed if one is to invest wisely in the tractor industry. The 4WT industry and other policy folks herald the achievement (as they should ) of reaching 6,00,000 tractors per year, but most conveniently ignore the fact that a very large percentage of the tractor population (some guesstimates are as high as 50% ) are being used for transport and construction “only”,. Again, from a recent tour in Odisha, a one of the largest 4WT agents agreed that popular opinion (and the industries own national advertising campaigns) feels that average sales of large tractors go farm use. He estimated that at least 50% of his sales go to transport only sector and that in last year his own local advertising has now both farm and transport only markets.

        This brings me to my final point that we all know how important the trailer and transport (rural and urban) is to the average tractor owner / tillage provider in making payments to the bank and increasing their profit margin. But what many don’t realize is this multiplier of the bottom line – the “transport sector” – is not available to the vast majority of 2WT owners. In the vast majority of states they have been regulated off the highways and rural bi-ways, This, along with the initial high purchase price are likely are the main reasons that there is slow growth for 2WTs in India.

    • it’s amazing how much you learn from the comments here. Hats off to everyone. entry of payment banks and small banks might actually change the dynamics of 2 WT’s – my sense is that with improved financing, it will actually become profitable for middle men who can rent 2 WTs to emerge and make a good ROCE. given the subsistence level of farmers who use 2WT’s it might make sense for them to use this as a service i the long run – look at how easy financing of cars, has started eating into the second car market because of ola, uber etc. I figure that such an asset which is in need for a short time during a year might actually be better rented than owned.

  19. Dear Jana,

    Can you throw some light on the CFO/Net profit ratio. Doesn’t it also show the accounting practices followed by the company. In this case a ratio of 1 may indicate that the company has higher non cash charges added back or working capital changes that cause this. What other reasons can one attribute for this ratio being less than 1.
    Also you have taken a charge of 10% on working capital on the pre tax earnings, shouldn’t one also get the after tax figure for a more accurate picture.

    Chetan Chhabria

Comments are closed.