Punjab Tractors: Parental guidance

Performance summary

• Topline grows by a robust 18% YoY during the quarter
• Operating margins fall marginally during the quarter led by higher raw material costs and other expenses
• Bottomline registers a growth of 38% YoY for the quarter as higher interest income and benign depreciation charges give further boost to profitability
• Net profits for the nine month period grow by a strong 120% YoY on the back of a 43% YoY growth in topline

Standalone numbers

(Rs m)	3QFY08	3QFY09	Change	9mFY08	9mFY09	Change
Net sales	3,030	3,588	18.4%	6,838	9,809	43.4%
Expenditure	2,650	3,144.4	18.7%	6,238	8,775	40.7%
Operating profit (EBDITA)	380	444	16.8%	600	1,034	72.4%
EBDITA margin (%)	12.5%	12.4%		8.8%	10.5%
Other income	9	38	317.4%	9	124	1251.1%
Interest (net)	(48)	(82)	69.8%	(103)	(204)	97.6%
Depreciation	44	45	2.7%	126	134	6.0%
Profit before tax	393	518	31.9%	586	1,229	109.6%
Extraordinary income/(expense)	-	-		-	-
Tax	139	168	20.9%	201	381	89.5%
Profit after tax/(loss)	254	350	37.9%	385	848	120.2%
Net profit margin (%)	8.4%	9.8%		5.6%	8.6%
No. of shares (m)	60.8	60.8		60.8	60.8
Diluted earnings per share (Rs)*					18.3
Price to earnings ratio (x)*					5.3

(* on a trailing 12-month basis)

What has driven performance in 3QFY09?

• Although volumes were higher by only 4% YoY during the quarter, the 18% growth in topline seems to be driven by a better product mix and higher realisations. Furthermore, the company did well to beat the industry volumes, which fell by a sharp 12% YoY during the quarter as against a growth of 9% during the first six months of the fiscal. Infact, the company’s own growth rate for the nine month period fell to 33% as against the first half number of 41% YoY. However, in light of what is happening in the other segments, it is a very commendable performance, a lot of credit for which should also go to the support from its parent M&M.

• A marginal slippage in operating margins during the quarter has seen its operating profits grow at a slightly lower rate than the topline during the quarter. The slippage is mainly because of higher raw material costs, which given the steep fall in commodities prices has come in as a surprise. The same perhaps seems to have been a factor of change in the company’s accounting policy as it has restated some of the past quarter’s numbers. Among other cost heads, the company has done well to keep its staff costs under check and this has helped it prevent any further damage at the operating level.
  Cost break-up…

  (Rs m)	3QFY08	3QFY09	Change	9mFY08	9mFY09	Change
  Raw materials	2,143	2,578	20.3%	4,814	7,085	47.2%
  % sales	70.7%	71.8%		70.4%	72.2%
  Staff cost	286	299	4.5%	800	903	12.9%
  % sales	9.4%	8.3%		11.7%	9.2%
  Other expenditure	222	268	20.9%	625	787	26.0%
  % sales	7.3%	7.5%		9.1%	8.0%

• The company’s net profits have grown by a strong 38% YoY during the quarter. This has come in much higher than the growth in operating profits mainly on account of higher other income and a benign depreciation outgo. Marginally lower tax rates have also helped the company report a strong bottomline performance.

What to expect?

The stock is currently trading at Rs 97, implying a multiple of 4.3 times our estimated FY11 cash flow per share. The company has managed to meet our full year FY09 projections in the first nine months itself, thus necessitating a relook at the financials. It should be noted that since the amalgamation plans of the company with its parent M&M are still awaiting approvals from one of the High Courts; we will continue to treat the company as a standalone entity.