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Punjab Tractors: Out of the woods? - Views on News from Equitymaster

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Punjab Tractors: Out of the woods?
Jan 22, 2008

Performance summary
  • For the first time in four quarters, the company reports a positive topline growth of 15% YoY.
  • Operating margins fall marginally owing to higher staff costs and other expenses.

  • Interest income and lower depreciation charges combine with operating profits to push the bottomline higher by an impressive 34% YoY.

  • For the nine month period, the bottomline falls 30% YoY on the back of a 6% decline in topline.

(Rs m) 3QFY07 3QFY08 Change 9mFY07 9mFY08 Change
Net sales 2,634 3,029 15.0% 7,296 6,837 -6.3%
Expenditure 2,303 2,650 15.1% 6,388 6,238 -2.3%
Operating profit (EBDITA) 331 379 14.5% 908 599 -34.0%
EBDITA margin (%) 12.6% 12.5%   12.4% 8.8%  
Other income - 10   42 10 -76.2%
Interest (net) 2 (48)   15 (103)  
Depreciation 40 44 10.0% 116 126 8.6%
Profit before tax 289 393 36.0% 819 586 -28.4%
Extraordinary income/(expense) - -   - -  
Tax 99 139 40.4% 269 201 -25.3%
Profit after tax/(loss) 190 254 33.7% 550 385 -30.0%
Net profit margin (%) 7.2% 8.4%   7.5% 5.6%  
No. of shares (m) 60.8 60.8   60.8 60.8  
Diluted earnings per share (Rs)* 12.5 16.7   18.1 9.2  
Price to earnings ratio (x)*         25.3  
(* on a trailing 12-month basis)

What has driven performance in 3QFY08?
As mentioned above, the company’s topline has shown a positive growth for the first time in four quarters. It has to be borne in mind that Punjab Tractors had undertaken an inventory correction exercise where while the sales at the dealer level were growing, it did not reflect in the company’s own dispatches. However, the exercise now seems to have been completed as is evident from the 15% YoY growth in topline. While specific volumes are not known, M&M, India’s largest tractor manufacturer and now the largest shareholder in Punjab Tractors, has registered a decline in the region of 6%-7% in volumes during the quarter and against this backdrop, the growth in Punjab Tractor’s topline is indeed commendable.

On the margins front, bulk buying by the parent seems to have had a positive impact on raw material costs as they have declined on a percentage of sales basis during the quarter. However, higher staff costs and other expenses have played spoilsport, resulting into a minor contraction in operating margins on a YoY basis.

cost break up
(Rs m) 3QFY07 3QFY08 Change
Raw materials 1,913 2,157 12.8%
% sales 72.6% 71.2%  
Staff cost 204 271 32.8%
% sales 7.7% 8.9%  
Other expenditure 186 222 19.4%
% sales 7.1% 7.3%  

With the company not undertaking any significant capex, depreciation growth has remained benign at 10% YoY. Moreover, the company also earned interest income to the tune of Rs 48 m during the quarter. Thus, the favorable movements in these items along with higher operating profits have led to the bottomline growth of 34% YoY during the quarter.

Over the last few quarters…
As seen from the table below, all the three parameters viz, sales growth, OPM and NPM have once again started looking good for the company. However, these are early days yet and whether the performance will continue in the coming quarters remains to be seen.

Over the last few quarters
  3QFY07 4QFY07 1QFY08 2QFY08 3QFY08
Sales growth (YoY) 2.3% -12.5% -28.6% -7.1% 15.0%
OPM 12.6% 9.0% 3.7% 7.5% 12.5%
NPM 9.3% 7.9% 1.9% 4.7% 8.4%

What to expect?
The stock is currently trading at Rs 233, implying a price to cash flow of 9 times its estimated FY10 cash flow. Our projections hinge upon the ability of M&M to improve the company’s capacity utilisation and enhance its operating margins. These operational improvements we believe, were the basis of M&M’s offer price of Rs 360 per share. Considering the stock is trading at a fair discount to the same, it appears a good ‘HOLD’ from a medium term perspective. The government thrust on agriculture is another positive for the stock.

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