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Punjab Tractors: The Indian Swaraj - Views on News from Equitymaster
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  • May 11, 2002

    Punjab Tractors: The Indian Swaraj

    If one were to look at the broader trend on the bourses over the last six months, apart from software sector, auto stocks have been buzzing with activity. But within the auto sector, tractor manufacturers have been languishing at the current levels for quite sometime. Punjab Tractors in one of them.

    Promoted by Punjab State Industrial Development Corporation (PSIDC) in 1971, Punjab Tractors Ltd. (PTRA) has come a long way. Despite being a state-managed company, its continuous focus on research and development and successful new product introductions have enabled it to become the second largest manufacturer of tractors in India. Over the years, PTRA has consistently increasing its share in the overall pie. The company’s market share for the year ended March 31, 2002 stood at 20% as compared to 19% last year (13% in FY94).

    The current year performance of the company was lacklustre. But the results have to be viewed in light of the fact that it has been a rough run for the tractor segment in the last two years (in FY02 industry volumes is estimated to have plummeted by 16%). Due to over-capacity and undercutting by some of the leading players, there has been a huge pile-up of inventory with the dealers. As a result, both volumes and realisations of PTRA were affected in FY01 also. While sales declined 8% to Rs 8,855 m, net profit fell by 10%. But a quarterly analysis of the company’s performance underscores the industry status.

    PTRA managed to gain market share for the first three quarters in FY01 with average quarterly volumes of 35,000 units. The company had a market share of 22% for 9mFY02, which dropped sharply in 4QFY02 due to aggressive ploy adopted by its peers. While industry volumes grew by 20% Q-o-Q, PTRA’s unit sales declined by 23% over 3QFY02. Instead of pushing volumes to the dealers, the company seems to have a cautious stand so as to maintain profitability, which is reflected in its operating margins. PTRA’s operating margins declined by only 30 basis points, which is comparatively lower than its peers.

    Apart from tractors, the company also is engaged in manufacturing of harvester combines, forklifts, castings (backward integration) and spare parts sales that together accounted for 8% of sales in FY01. Except for spare parts, we expect the contribution to remain stagnant from other interest areas. The backward integration and value engineering efforts taken by the company over the years has placed PTRA on a very competitive scale when it comes to end product pricing, without sacrificing profits. The following table reveals the average realisation per vehicle for the company along with its key competitors.

    A comparative analysis…
    (Rs)* Avg. Realisation/
    Tractor sold
    Punjab Tractors 232,011
    M&M 240,335
    Gujarat Tractors 241,627
    Escorts 242,945
    *FY01 data

    But there are some concerns as well. The company has a commanding market share in states like Punjab and Haryana, where tractor penetration is one of the highest in India (though lower by international standards). So growth prospects, to that extent, are limited. But PTRA has made considerable progress in other regions as well over the last three years, which is creditable. The company has a 20% market share in UP and MP that accounted for as high as 37% of industry volumes in FY01. But at the same time, it still has a long way to go in Southern market (16% market share) where peers like TAFE and M&M have a strong presence.

    State-wise demographics…
    (% of sales) Industry PTRA market share
    Punjab & Haryana 16.0% 21.0%
    UP and MP 37.0% 20.0%
    Bihar, WB & Orissa 11.0% 19.0%
    Raj, Guj & Mah 17.0% 16.0%
    AP, Kar, TN, Kerala 16.0% 16.0%

    Besides, competition has increased significantly in the industry with a number of global players like John Deere and New Holland setting up manufacturing facilities in the country. Fresh capacities have come at a time when demand has been subdued. Growth prospects in the near term also remain challenging. So price realisation might continue to be under competitive pressure.

    Wider product portfolio…
    (% of sales) Industry Market share (%)
    Above 50 BHP 3.2% 67.0%
    41-50 BHP 18.0% 17.0%
    31-40 BHP 56.8% 20.0%
    Upto 25 BHP 22.0% 7.0%
    Industry 100.0% 18.1%

    Nevertheless, going forward, we expect the company’s market share to increase in the 41-50 BHP and above 50 BHP segment. Together both the segments contributed to 29% of unit volumes for the company. This along with the value engineering initiatives taken by the company would also benefit in the long run. The size of the tractor market has more than doubled in the current decade, making India the largest market in the world. We expect the industry to grow in line with the GDP growth in the future. Given the long-run potential of the sector, Punjab Tractors is expected to improve its overall market share as well.

    The stock currently trades at Rs 150 implying a P/E multiple of 9x FY02 earnings. Given its market leadership, conservative financial accounting standards, past track record of the management and increasing awareness of farm mechanisation, PTRA is set to benefit from any upturn in industry volumes. At the current juncture, valuations are on the attractive side from a medium to long-term perspective.



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