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Punjab Tractors: Lets focus on the business! - Views on News from Equitymaster

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Punjab Tractors: Lets focus on the business!

May 12, 2006

Introduction to results
Punjab Tractors, the third largest tractor manufacturer in the country, has announced its 4QFY06 and FY06 results. For 4QFY06, while the topline grew by 7% YoY, the bottomline witnessed a marginal decline. This was primarily due to contraction in operating margins and a sharp increase in interest costs. For FY06, the topline registered a 12% YoY growth. However, the net profits grew by 106% YoY, led by profit on sale of stake in one of the group companies.

(Rs m) 4QFY05 4QFY06 Change FY05 FY06 Change
Net sales 2,353 2,514 6.8% 8,580 9,586 11.7%
Expenditure 1,983 2,131 7.4% 7,441 8,325 11.9%
Operating Profit (EBDIT) 370 383 3.5% 1,139 1,261 10.7%
Operating Profit Margin (%) 15.7% 15.2%   13.3% 13.2%  
Other Income 7 3 -63.8% 50 47 -6.8%
Interest (net) 6 13 126.3% 58 64 10.7%
Depreciation 40 36 -8.9% 160 152 -4.7%
Profit before Tax 332 337 1.5% 972 1,092 12.4%
Extraordinary items         613  
Tax 121 126 4.6% 343 411 20.0%
Profit after Tax/(Loss) 211 210 -0.3% 629 1,293 105.7%
Net profit margin (%) 9.0% 8.4%   7.3% 13.5%  
No. of Shares (m) 60.8 60.8   60.8 60.8  
Diluted Earnings per share (Rs)   3.5     21.3  
P/E ratio (x)         13.3  

What is the company’s business?
Punjab Tractors is among the leading tractor manufacturers 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 it had a 15% market share in FY05. During the period between FY94 and FY05, the company’s volumes have grown at a compounded rate of 4.7%, though underperforming the industry that has grown at a rate of 5.3% during the same period.

What has driven the performance in 4QFY06?
Another quarter of underperformance: Ever since the new management took over the company, the company continues to lose market share and 4QFY06 was no different. Increased competition from existing players like M&M and select international players affected the company’s performance. It should be noted that Punjab Tractors has been losing market share since FY01. To give a perspective, the company’s market share, which stood at 18% in FY01 was 12% in FY05. This, we estimate to have fallen further.

Operating margins – Steady state: During 4QFY06, the company reported a decline of 50 basis points (0.5%) in operating margins. This is on account of a 90 basis points (0.9%) increase in other expenses as a percentage of sales. While the details of other expenses are unavailable, it could be on account of higher sales and promotional expense to sustain market share.

For FY06, operating margins declined marginally. This is primarily on account of a significant increase in the raw material costs. However, it should be noted that most of the automobile players have been able to reap the benefit of declining steel prices off late. Unless the management regain focus, we remain concerned about the financial performance going forward.

Cost break-up…
  4QFY05 4QFY06 Change FY05 FY06 Change
Raw materials 1,680 1,794 6.8% 6,235 7,032 12.8%
% of sales 71.4% 71.4%   72.7% 73.4%  
Staff cost 180 183 1.6% 695 735 5.7%
% of sales 7.7% 7.3%   8.1% 7.7%  
Other expenses 123 152.6 24.1% 511 557.6 9.1%
% of sales 5.2% 6.1%   6.0% 5.8%  

Bottomline: The interest impact: 4QFY06, profits decline marginally. This mainly on account of a sharp increase in the interest costs. It should be noted that company has been facing pressure on the interest front from last two quarters. The capacity utilisation is nowhere near the rate in the late 1990s, which in our view is one of the reasons. Secondly, the maintain volumes, we believe that the company is being forced to offer higher credit period to customers (average debtor days in FY05 stood at around 170 days).

For FY06, interest expense has increased by 10% YoY. However, as stated earlier, most of the increase can be attributed to higher interest charges in the last two quarters. Though net profit has grown at a faster clip, excluding the one-time profit from the sale of stake in a group company, growth stands at 8% YoY in FY06.

What to expect?
At the current price of Rs 283, the stock is trading at price to earnings multiple of 25.3 times FY06 earnings (excluding extraordinary income). As stated earlier, the company has been losing market share over past five years. Apart from this, the conflict at the management level is a known issue, which is not yet resolved. This is clearly affecting shareholder value and therefore, we would be cautious towards the stock.

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