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Building on strengths - Views on News from Equitymaster
 
 
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  • Jan 6, 1999

    Building on strengths

    Background

    • Punjab Tractors Ltd (PTL) was promoted in 1970, by Punjab Industrial State Development Corp., with equity participation from financial institutions. PTL is the only tractor manufacturer in the country to have total indigenous technology.

    • The company with a 290-strong dealer network sells its products under the ' Swaraj' brand name. Over the years, the Swaraj brand name has established a name for quality and reliability (low maintenance cost). Not so long ago, its products used to enjoy a waiting period in the market (only manufacturer to have so). This is despite the fact that orders are booked only against advances.

    • Besides tractors, it also manufactures agricultural accessories like harvester combines and forklifts. In FY84, it entered into a technical collaboration with Komatsu Fork Lifts, Japan, for making diesel and electric forklifts. Its plant is located at Ropar, Chandigarh, (capacity 42,000 units p.a.). It has set up a new plant at Mohali, Punjab (60,000 units p.a.) to meet increasing demand.

    • In 1984, PTL promoted Swaraj Mazda in collaboration with Mazda Motors, Japan for manufacturing LCVs. However, Swaraj Mazda turned sick due to the rising yen and increasing competition from domestic competitors, and was referred to the BIFR. The company turned round after that and has been making profits since FY95. It posted net profit of Rs 667 m in FY98.

    • PTL has also promoted Swaraj Engines Ltd, (SEL) in collaboration with Kirloskar Oil Engines for manufacturing diesel engines. SEL's engines are captively consumed by PTL.

    • PTL is virtually debt-free and has been generating cash surplus in excess of its capital expenditure in the past. It has the highest operating margins (18.5% in FY99) in the sector, due to its low cost operations. The operating margins of its competitors varies between 10-14%.
    • Tractors contribute nearly 92% of PTL's total sales. PTL manufactures a wide range of tractors, but does not have product in the 41-50 HP category, which currently accounts for 16.8% of total tractor sales in the country.
    • The company has been able to increase its market share steadily over the past few years, after entering into the southern and western markets, away from its traditional northern stronghold. Its superior sales service and region specific models (for soil hardness, etc.) have enabled it to increase market share in almost all states.

    Financial performance

    • PTL has performed consistently over the past 5 years (FY93-98) with a compounded annual growth rate of 28.8%. Over the same period, growth in volumes has been 19.7%, nearly double the tractor segment average of 10.3%.

    • In FY99, the company improved its operating margins by 1.8% through a mix of lower raw material costs and distribution overheads. In FY97-99, the company had incurred capital expenditure of over Rs 900 m, mainly on enhancing its manufacturing facilities. The new plant at Mohali, Punjab, was completed in FY99, and will increase capacity by 60,000 units p.a. to 102,000 units p.a.

    • While it sales in FY99 improved by only 9.7%, net profit rose by an impressive 33.7%.

    Future

    • PTL is likely to maintain its high operating margins with aggressive cost cutting and higher capacity utilisation in its second plant. It will be in a much better position to handle downward pressure on prices than its competitors.

    • With its capacity expansion at Mohali completed, capex will now be lower and this is expected to result in increased cash surplus, at least over the next 2 years.

    • Tractor demand has been growing at a CAGR of 15% between FY95-98. High demand for tractors in the short term as well as the long term will enable PTL to sustain its strong volume growth in excess of 10% over the next 2 years. It is poised to increase market share to 20% in FY2000 from 18% in FY99.

     

     

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