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Punjab Tractors: Our key assumptions - Views on News from Equitymaster
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Punjab Tractors: Our key assumptions
Jun 16, 2005

Punjab Tractors (PTRA), a leading player in the Indian tractor industry has witnessed buying interest since April 2005. While the optimism stems from the performance of the tractor industry since 2HFY04, we shall try to analyse whether the fundamentals of the company justifies the buying interest. Let us begin with key assumptions for the next three years, based on which we have arrived at the conclusion.

  • Industry growth: With easy availability of finance, governments thrust on rural credit and rural infrastructure, we believe that industry is poised to grow in the region of 6% to 8% in next three years.

  • Reducing market share: As can be seen from the chart below, the company’s market share has been steadily under pressure due to increased competition and excessive capacity additions. We have factored in a further reduction in the market share in the coming years.

  • Realisation under pressure: Given the fact that the industry is operating with capacity utilisation of less than 60%, the ability to increase prices will be limited, as each player would want to capture the underlying growth in demand. According to us, this is a handicap. Though we have considered a marginal increase in its average realisation (1.5% per annum), it is on the lower side considering average inflation at around 5% to 6%.

  • Capex: As the utilisation levels are on the lower side, we believe that there is no urgent need for the company to increase its capacity. Hence, we have factored in normal increase required to maintain the existing plants.

  • Debt position: With the upturn in the tractor industry, the company has managed to bring down its debt levels to 7% of capital employed in FY05 from as high as 30% in FY01. We expect the debt levels to stabilize at 3% levels from FY06. This will enable PTRA to improve its net margins.

  • High debtor days: During the period FY01-FY03, the industry resorted to advance selling increasing credit period in order to boost sales (see chart). While we do not expect the debtors to be at such high levels, we expect the trend of credit selling to continue on account of competition and excessive supply situation.

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