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Punjab Tractors: Getting there - Views on News from Equitymaster

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Punjab Tractors: Getting there
May 7, 2008

Performance summary
  • Topline for the full year grows by 2% YoY despite a 7% YoY fall in volumes.
  • Wage inflation and higher other expenditure leads to a 160 basis point contraction in operating margins in FY08.

  • Bottomline falls 16% YoY but mainly due to the presence of extraordinary income in FY07. Excluding the same, bottomline fall is restricted to 3% YoY.

  • For the fourth quarter, the company’s bottomline jumps an impressive 54% YoY on the back of a 30% YoY growth in topline. Excluding extraordinary income, bottomline growth stands at an even more impressive 124% YoY.

(Rs m) 4QFY07 4QFY08 Change FY07 FY08 Change
Net sales 2,207 2,859 29.5% 9,503 9,696 2.0%
Expenditure 2,010 2,487 23.8% 8,398 8,725 3.9%
Operating profit (EBDITA) 198 372 87.8% 1,106 971 -12.2%
EBDITA margin (%) 9.0% 13.0% 11.6% 10.0%
Other income 1 14 43 24 -44.3%
Interest (net) (6) (43) 664.3% 9 (146)
Depreciation 39 43 11.3% 155 169 9.3%
Profit before tax 166 385 132.5% 985 971 -1.4%
Extraordinary income/(expense) 55 - 111 -
Tax 46 118 155.7% 315 319 1.3%
Profit after tax/(loss) 174 267 53.5% 780 652 -16.4%
Net profit margin (%) 7.9% 9.3% 8.2% 6.7%
No. of shares (m) 60.8 60.8 60.8 60.8
Diluted earnings per share (Rs)* 12.8 10.7
Price to earnings ratio (x)* 24.5

What has driven performance in FY08?
  • As mentioned, company’s volumes have fallen 7% YoY for the full year. However, since the company has undergone channel inventory correction, sales at the retail level seems to be on the higher side. What was further heartening from the company’s point of view was the gain in market share in the fourth quarter, which stood at 10.6% against last year’s 8.1%. It looks like the steps of M&M, the new promoter of the company, at shoring up the company’s sales as well as operations seemed to be having the desired impact. This can be gauged from the fact that Punjab Tractors’ topline performance has really got a leg up in the second half of the fiscal as the company was struggling in the first half and had recorded a 18% YoY dip in topline. Furthermore, with the company operating at well below optimum capacity, there is scope for further upside in revenues.

  • The company’s fourth quarter operating margins have jumped by an impressive 400 basis points. Here too, M&M’s strategies seem to be paying off as better product-mix, cost reduction exercises, value engineering efforts, sourcing synergy with the parent and better cash management have all combined together to result into operating margin improvement of such a magnitude. For the full year though, margins have contracted by 160 basis points as the company could not completely offset the damage caused by the first half performance, where margins tumbled 660 basis points. Major improvement has been seen on the raw material costs front as they are lower by 200 basis points for the full year on a cost percentage basis.

    cost break up
    (Rs m) 4QFY07 4QFY08 Change FY07 FY08 Change
    Raw materials 1,593 1,990 24.9% 6,878 6,831 -0.7%
    % sales 72.1% 69.6% 72.4% 70.4%
    Staff cost 218 264 21.4% 827 1,021 23.5%
    % sales 9.9% 9.2% 8.7% 10.5%
    Other expenditure 199 233 17.1% 693 873 26.0%
    % sales 9.0% 8.2% 7.3% 9.0%

    With the company not undertaking any significant capex, depreciation growth has remained benign at 9% YoY for the full year. The company also earned interest income to the tune of Rs 146 m during the fiscal, a result of rationalization of channel stocks, which lowered working capital requirement and thus the interest costs. While these factors helped prop up the bottomline, it still witnessed a greater decline than the operating profits, falling by 16% YoY for the full year. However, if one excludes the extraordinary income that the company received in FY07, bottomline decline stands reduced to mere 3% YoY.

What to expect?
The stock is currently trading at Rs 260, implying a price to cash flow of 10 times its estimated FY10 cash flow. We had assumed the company to report a slightly better operating performance for the full year but with the company failing to do so, its EPS has come 20% below our FY08 estimates. Nonetheless, it still is an impressive performance from the company that a few quarters back was struggling to remain profitable. We will incorporate these and other changes when we come out with our revised estimates on the company shortly.

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