United Tractors - February Komatsu volumes remain at rarified levels, 6% drop this week is an opportunity - ALERT - JP Morgan

• February Komatsu volumes remain at rarified levels: UNTR’s February Komatsu deliveries remained exceptionally high at 687 units, up 74% y/y, but slightly off from January’s 731 units, fully explainable by the shorter work month. YTD volumes are now up 93% y/y, and already account for 25% of our full year forecasts. Even if a slowdown sets in later in the year as we anticipate, the higher early year trajectory opens up upside risk to earnings forecasts. Every 125 units ahead of forecast could add about 1% to FY11E EPS.

• Slow start to mining contracting: Contract mining output was flat y/y (6.2mMT) in February. YTD output is up about 2% y/y. We attribute the sluggish start to the year largely to weather. 2009 started similarly (up 2% y/y in 1Q), but UNTR caught up with production targets subsequently during the year and output ended FY09 up 15% y/y. We therefore do not see this as a risk to earnings at this point.

• Own coal output tracking nicely: UNTR’s own coal output stood at 326 kMT in February, up 20% y/y. The step up in production is encouraging, and broadly moving towards our 4mMT FY11E estimate. UNTR's second mine TTA has contributed 65-70 k MT per month YTD, and we would watch closely for a step up in production at this unit, which could develop a source of upside risk to volumes and forecasts.

• Komatsu update: UNTR has underperformed sharply since news of the Japanese earthquake broke– on fears of supply disruption from Komatsu and/or reallocation of future supplies towards the Japanese market. We see these as overdone, albeit acknowledging a fluid situation. Smaller construction machinery sold in Indonesia is mostly manufactured locally with a well developed indigenous vendor base. While the Komatsu Ibaraki factory (producing large dump trucks) has been taken offline (see table overleaf), there are 3-4 other facilities capable of stepping in. UNTR has reported adequate supply to cover 2 months of deliveries.

• We see the 6.4% drop this week as an opportunity: We believe UNTR’s 6.4% drop this week presents an opportunity, given our understanding of supply risks and expect the stock to respond positively to today’s after market release of volumes.