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Punjab Tractors: Almost there! - Views on News from Equitymaster
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  • Jun 2, 2004

    Punjab Tractors: Almost there!

    Punjab Tractors, one of India's leading manufacturers of tractors, has posted robust fourth quarter FY04 results. In terms of both sales volumes as well as profits recorded, fourth quarter performance has stood out as the best in the last eight quarters. While the topline of the company has witnessed a strong 60% YoY growth, the bottomline has vaulted 101%. For the full year however, it has continued to experience pressure at the net profit levels, as they fell by nearly 3% despite a 9% YoY rise in topline.

    (Rs m) 4QFY03 4QFY04 Change FY03 FY04 Change
    Net sales 1,148 1,838 60.2% 5,468 5,973 9.2%
    Other income 2 28 1154.5% 43 60 38.0%
    Expenditure 972 1,595 64.1% 4,575 5,217 14.0%
    Operating profit (EBDITA) 176 244 38.6% 893 757 -15.2%
    Operating profit margin (%) 15.3% 13.3%   16.3% 12.7%  
    Interest (net) 33 19 -42.3% 143 98 -31.5%
    Depreciation 40 45 10.4% 170 165 -3.4%
    Profit before tax 104 208 98.9% 622 554 -11.1%
    Tax 21 40 90.6% 191 133 -30.2%
    Profit after tax/(loss) 83 167 101.0% 431 420 -2.6%
    Net profit margin (%) 7.2% 9.1%   7.9% 7.0%  
    No. of shares (m) 60.8 60.8   60.8 60.8  
    Diluted earnings per share (Rs)* 5.5 11.0   7.1 6.9  
    P/E ratio (x)         31.1  
    (* annualised)            

    Revival in tractor sales, which first came to the fore during the third quarter, further accelerated its pace during 4QFY04, as sales volumes during the second half improved by a strong 47% on a YoY basis. Thus on account of better sales performance during the second half (first half volume sales having shown negative growth), volumes grew 7% for the year as compared to FY03. While the growth in topline after three years of decline has come as a welcome relief, the growth in tractor sales of the company has lagged behind the overall industry growth rate of about 11%, thus resulting in a loss of market share. Growth in topline for the full year is higher than the overall growth in volumes, perhaps a result of improved product mix.

    Since the fortunes of the industry are predominantly linked to the health of the agriculture sector, a drought like condition in major states of MP, Rajasthan, Gujarat and the Southern region in calendar year 2001 and a drought all over India in calendar year 2002 affected industry sales. Moreover, with nearly 65 m to 75 m tonnes of food piling up in government godowns, it led to a squeeze in purchasing by the government, thus resulting into lesser income in the hands of rural populace. Also, on account of low recoveries of debt, banks became skeptical of lending to farmers and this led to a marked decrease in the availability of credit. All these reasons led to a lower demand for tractors and impacted industry sales.

    However, starting 2QFY04, industry volumes have been on the rise. With 32 of the 36 meteorological divisions receiving normal to excess rainfall, the agricultural production has improved significantly and grew by a strong 17% on a YoY basis during 3QFY04. Moreover, the buffer stocks available with the government have also come down by 30 m tonnes and stood at 35 m tonnes level as of June'03. This has led to and will continue to ensure higher procurement thus driving up the farmer's income, a positive sign for leading players like Punjab Tractors.

    On the operating front, the margins have taken a hit of nearly 360 basis points for the full year. This could largely be attributed to strong steel prices, which forms a key input for the industry. Also, on account of poor demand, industry players have not been able to pass on the price hike to its customers, thus resulting into a squeeze at the operating level. Going forward, we expect the operating margins to improve from current levels on the back of improved capacity utilisation and some softening of steel prices. Despite a 15% fall at the operating level, reduction in interest outgo and absence of any significant capital expenditure has meant that the fall in bottomline is restricted to 3%.

    Cost break-upů
    (Rs m) 4QFY03 4QFY04 Change FY03 FY04 Change
    Raw materials 726 1,242 71.1% 3,468 3,980 14.8%
    % sales 63.3% 67.6%   63.4% 66.6%  
    Staff cost 145 153 5.5% 609 647 6.2%
    % sales 12.6% 8.3%   11.1% 10.8%  
    Other expenses 101 200 98.0% 498 590 18.5%
    % sales 8.8% 10.9%   9.1% 9.9%  

    The stock is currently trading at Rs 215, implying a P/E of 31x its annualised FY04 earnings. While the valuations appear to be rather stretched at the current juncture, it should be remembered that the industry is in a turnaround mode after three years of de-growth and therefore a substantial growth in profits cannot be ruled out. Having said that, any adverse monsoon patterns might disrupt the growth story.



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