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Punjab Tractors: A bumper harvest - Views on News from Equitymaster

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Punjab Tractors: A bumper harvest

Jul 21, 2008

Performance summary
  • Topline jumps an impressive 80% YoY on the back of strong volume growth.
  • A significantly lower base coupled with savings on the cost front enable operating margins to record a huge 530 basis point improvement.
  • PAT jumps nearly seven fold as high other income and low depreciation charges add further meat to the strong operating performance

(Rs m) 1QFY08 1QFY09 Change
Net sales 1,739 3,141 80.6%
Expenditure 1,674 2,856 70.6%
Operating profit (EBDITA) 65 285 338.5%
EBDITA margin (%) 3.7% 9.1%  
Other income - 26  
Interest (net) (20) (53) 165.0%
Depreciation 41 44 7.3%
Profit before tax 44 320 627.3%
Extraordinary income/(expense) - -  
Tax 11 96 769.1%
Profit after tax/(loss) 33 224 580.0%
Net profit margin (%) 1.9% 7.1%  
No. of shares (m) 60.8 60.8  
Diluted earnings per share (Rs)*   13.9  
Price to earnings ratio (x)*   16.1  

What has driven performance in 1QFY09?
  • The robust growth in topline was led by tractor sales, which improved 77% YoY, significantly higher than the industry growth rate of 13% YoY. It should be noted that during same quarter last year, the company had recorded a decline of 28% YoY in its topline owing to poor sales. Hence, a low base also played its part in giving the topline a significant boost. Furthermore, with M&M taking over the reins of the company, the experience and the reach of the former seems to have been instrumental in effecting such a quick turnaround as well as the strong industry out performance of the company.

  • A small base effect has also worked wonders for the operating profits of the company as they have jumped more than four-fold on the back of small decline in operating costs. Having said that, given the current high commodity price environment, raw material expenses continued to rise relentlessly, growing at the same rate as topline. The biggest boost to operating margins has come from staff costs, which although increasing by 40% on a YoY basis, have come off 300 basis points as a percentage of sales.

    cost break up
    (Rs m) 1QFY08 1QFY09 Change
    Raw materials 1,254 2,260 80.2%
    % sales 72.1% 72.0%  
    Staff cost 237 332 40.1%
    % sales 13.6% 10.6%  
    Other expenditure 183 264 44.3%
    % sales 10.5% 8.4%  

  • The company’s net profits have jumped more than seven fold on a YoY basis. Besides a strong operating performance, benign depreciation charges and income on its surplus funds have been the reasons behind the company’s stupendous performance at the net profit level. Important to add that the company has a lot of spare capacity available and hence it did not have to undertake huge capex spending. This led to the depreciation increasing only marginally by 7% YoY. Furthermore, with the company seemingly in a net cash position, income from surplus funds has helped further boost bottomline.

What to expect?
The stock is currently trading at Rs 224, implying a price to cash flow of 10 times its estimated FY11 cash flow. We are enthused with the performance of the company during the quarter under consideration and this strengthens our belief that the company will continue to report robust numbers under the new management. Spare capacity, low capex needs and a strong balance sheet makes Punjab Tractors an attractive low risk bet in the Indian auto space from a medium term perspective.

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