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Punjab Tractors: Taking baby steps - Views on News from Equitymaster

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Punjab Tractors: Taking baby steps

Jul 27, 2006

Performance Summary
Punjab Tractors, one of India’s leading manufacturers of tractors, has put up a decent show for the quarter ended June 2006. While the growth in topline has been a rather modest (2% YoY), profits at the operating level have improved by 18% and the bottomline by an impressive 88% YoY. This growth in bottomline is after excluding the extraordinary income that the company had earned during last quarter.

(Rs m) 1QFY06 1QFY07 Change
Net sales 2,380 2,436 2.4%
Expenditure 2,125 2,135 0.5%
Operating profit (EBDITA) 255 301 18.0%
EBDITA margin (%) 10.7% 12.4%  
Other income 613 2 -99.7%
Interest (net) (15) (5) -66.7%
Depreciation 40 38 -5.0%
Profit before tax 813 260 -68.0%
Tax 106 83 -21.7%
Profit after tax/(loss) 707 177 -75.0%
Net profit margin (%) 29.7% 7.3%  
No. of shares (m) 60.8 60.8  
Diluted earnings per share (Rs)* 46.5 11.7  
Price to earnings ratio (x)**   16.4  
(* annualised, ** on trailing twelve months earnings)

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 performance in 1QFY07?
Modest topline growth comes as a surprise: After recording two successive years of double digit growth rate, the tractor industry has continued in similar vein during 1QFY07, notching a growth rate of 34% over 1QFY06. However, the absence of a significant market share in the fastest growing tractor segment of above 40 HP seems to have taken its toll on the company’s performance, as the topline growth for Punjab Tractors has been a mere 2%. Whether this is just an aberration remains to be seen.

Cost savings aid margin expansion: Auto companies have a high operating leverage where a small change in cost can lead to a quantum jump in profits. Similar factor seems to be at work with Punjab Tractors where the operating profits have jumped 18% YoY on the back of slightly lower raw material cost as a percentage of sales.

Cost break-up…
(Rs m) 1QFY06 1QFY07 Change
Raw materials 1,804 1,784 -1.1%
% sales 75.8% 73.2%  
Staff cost 183 202 10.4%
% sales 7.7% 8.3%  
Other expenses 138 149 8.0%
% sales 5.8% 6.1%  

Lower tax provisioning as well as interest costs further props bottomline: With Punjab Tractors along with the industry coming out of the slump that saw inventory reach record levels, working capital requirement has reduced drastically for the company. This is reflected in the savings on the interest front, as the outgo has been lower by 66% as compared to 1QFY06. Thus, the lower interest outgo coupled with lower tax provisioning have further pushed the bottomline growth to 88%.

Last year, the company sold its stake in Swaraj Mazda and this resulted in extraordinary gain for the company to the tune of Rs 613 m. If one excludes this gain, then we arrive at the above mentioned bottomline growth of 88%. Including this extraordinary gain, the bottomline has actually fallen by 75%

What to expect?
The stock is currently trading at Rs 206, implying a price to cash flow of 12 times its estimated FY08 cash flow. With a new management at the helm and a much improved balance sheet, good times lie ahead of the company. If the volumes pick up from here, the company can turn into an attractive medium term story.

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