Punjab Tractors: Cautious stand

The slowdown in the economy and increased competition is clearly reflected in Punjab Tractor's FY02 performance (PTRA). While topline has declined by 8% for the full year ended March 31, 2002, profits have fallen by 10% during the same period. The company seems to have witnessed a sharp decline in market share in 4QFY02. Nevertheless, for the full year, PTRA has managed to consolidate its standing in the Indian tractor industry.

(Rs m)	4QFY01	4QFY02	Change	FY01	FY02	Change
Net sales	2,348	1,940	-17.4%	9,645	8,855	-8.2%
Other Income	-	2		20	39	95.0%
Expenditure	1,904	1,598	-16.1%	7,785	7,170	-7.9%
Operating Profit (EBDIT)	444	342	-23.0%	1,860	1,685	-9.4%
Operating Profit Margin (%)	18.9%	17.6%		19.3%	19.0%
Interest (net)	(1)	47		(1)	115
Depreciation	70	48	-31.4%	201	179	-10.9%
Profit before Tax	375	249	-33.6%	1,680	1,430	-14.9%
Tax	164	69	-57.9%	555	420	-24.3%
Profit after Tax/(Loss)	211	180	-14.7%	1,125	1,010	-10.2%
Net profit margin (%)	9.0%	9.3%		11.7%	11.4%
No. of Shares (m)	60.8	60.8		60.8	60.8
Diluted Earnings per share*	13.9	11.8		18.5	16.6
P/E Ratio (x)		12.4			8.8
* annualised

Though the results are below our expectations, PTRA seems to have taken a cautious stand instead of jumping into the volume game. The company historically, is known for its conservative approach. Having said that, competition has increased manifold over the last two years with a number of MNCs setting up manufacturing facilities in India. Also, tractor demand remained subdued in FY02 due to slowdown in the economy and unrest in some parts of Northern India. Tractor industry volumes for FY02 are estimated at 198, 502 units, a 21% fall compared to the corresponding period last year. PTRA's sales has come down from 45,712 units last year to 40,100 units in FY02, an 11% decline, which works out to a market share of around 20% (18% in FY01).

Consider PTRA's quarterly performance. As against the average quarterly sales of 3,500 units, the company managed to achieve just 2,700 units in 4QFY02. One of the key reasons for the sharp fall in sales in 4QFY02 could be on account of the company taking a cautious stands towards inventory level, while other players were pushing in for volumes, which is the general trend in the auto industry. This is evident from the graph below reflecting the average quarterly sales of the industry and PTRA. As against quarterly average of 16,000 units, in 4QFY02 volume touched as high as 20,000 units. Consequently, though PTRA managed to increase market share YoY, the share is lower compared to almost 23% market share for the first nine months of the current year. Competition and a subdued demand scenario seems to have exercised a downward pressure on realisations too.

Apart from tractors, the company generates 8% of sales from other segments like harvester combines, forklifts, castings and spare parts. Except for spare parts sales, volumes from other businesses remained subdued. Other income has gone up sharply for FY02. Despite stiff competition and unfavorable macro-economic environment, the company has managed to hold on to its margins. Interest outgo has increased significantly but these are basically for servicing working capital. Lower depreciation and tax charges combined with a significant rise in other income have prevented the company's profits from a sharp fall.

The stock currently trades at Rs 147 implying a P/E multiple of 8.8x FY02 earnings. The long run prospects of the industry remain positive in light of lower mechanisation levels in India combined with growing awareness of the same. The rise in farm output in FY02 augurs well for the industry in the coming fiscal and growth could accelerate if the country witnesses another normal-cum-equitable monsoon. Besides, sales of above 41 BHP segments currently contribute around 29% of PTRA's unit sales and we expect the mix to shift more favorably towards higher BHP segment in the future. This along with continuing emphasis to improve efficiency standards point towards an improving profitability scenario. The stock currently trades at 8x FY03E earnings and based on peer value comparison, valuations at the current juncture seems to be attractive from a medium to long term perspective.