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Punjab Tractors: Steady show...

Apr 27, 2005

Introduction to results
Punjab Tractors, one of the leading tractor manufacturers in the country, announced its March quarter results today, wherein it reported a 28% YoY increase in topline. Despite a substantial increase in raw material costs, the control over other operating costs helped the operating margins during the quarter improve by 250 basis points. Had there not been a substantial rise in tax obligation (up 202% YoY), coupled with the drastic fall in other income, the bottomline, which grew by 26% YoY in 4QFY05, would have shown a better performance.

What is company’s business?
Punjab Tractors is the second largest tractor manufacturer in the country with a pan India presence. The company is primarily engaged in the business of tractors, self-propelled harvester combines and rice transplanters. Further, the company also manufactures forklifts. The company’s forte is 31-40 HP tractors where in it has 17% market share.

(Rs m) 4QFY04 4QFY05 Change FY04 FY05 Change
Net sales 1,838 2,353 28.0% 5,973 8,580 43.6%
Other Income 28 7 -75.4% 60 50 -16.8%
Expenditure 1,595 1,983 24.3% 5,217 7,441 42.6%
Operating Profit (EBDIT) 243 370 52.3% 756 1,139 50.6%
Operating Profit Margin (%) 13.2% 15.7%   12.7% 13.3%  
Interest (net) 19 6 -70.0% 98 58 -41.1%
Depreciation 45 40 -12.2% 165 160 -3.3%
Profit before Tax 207 332 60.2% 553 972 75.7%
Tax 40 121 201.8% 133 343 157.7%
Profit after Tax/(Loss) 167 211 26.3% 420 629 49.7%
Net profit margin (%) 9.1% 9.0%   7.0% 7.3%  
No. of Shares (m) 60.8 60.8   60.8 60.8  
Diluted Earnings per share (Rs)* 11.0 13.9   6.9 10.4  
P/E ratio (x)         16.6  
*annualised            

What has driven the performance in FY05?
Industry coming out of the trough:  After witnessing a downturn due to a drought-like situation for more than 3 years, the tractor industry displayed signs of revival from 4QFY04 aided by the (late) recovery of monsoons. For Punjab Tractors, this coupled with better product mix, whereby tractors in higher HP range constituted a significant chunk of overall volumes, enabled the company to achieve a topline growth of 43% in FY05. Also, excise duty benefit handed out to the industry in Budget 2004-05 helped improve matters.

Cost break-up…
  4QFY04 4QFY05 Change FY04 FY05 Change
Raw materials 1,242 1,766 42.2% 3,980 6,232 56.6%
% of sales 67.6% 75.0%   66.6% 72.6%  
Staff cost 153 180 17.8% 647 695 7.5%
% of sales 8.3% 7.7%   10.8% 8.1%  
Other expenses 200 123 -38.5% 590 511 -13.4%
% of sales 10.9% 5.2%   9.9% 6.0%  

Higher utilisation levels protect margins:  Despite a significant rise in the cost of raw materials (see table above), the company has been able to improve its operating margins by 60 basis points in FY05. Higher capacity utilisation with improved product mix enabled the company to achieve economies of scale thereby reducing staff costs and other operating expenses. With steel price showing no signs of cooling off in the near future, pressure on margins is likely to persist.

It all trickle downs to the bottomline:  Apart from the control over operating costs, a 75% reduction in interest costs during the year enabled the bottomline to grow at a higher rate than the topline. It should be noted that last year, the company had retired its debt amounting to Rs 645 m (borrowed largely to meet working capital requirements), which enabled the company to reduce its interest outgo. Having said that, the bottomline could have been much higher but for the 158% rise in tax expenses during FY05.

What to expect?
At Rs. 172, the stock is trading at 16.6 times its FY05 earnings. With increasing government thrust on agriculture, easy availability of agricultural credit and above all, expectations of normal monsoons in the current fiscal, the tractor industry is poised to witness another good year. Further, post the change in management; there has been an improved performance by the company with the management having adopted a proactive strategy. However in the near-term, the current valuations of the stock seem to have factored in all the positives. In this space, we prefer M&M due to its diversified product portfolio and strong fundamentals, which will help it withstand the vagaries of monsoon, if any.

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