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Punjab Tractors: Turnover down 27% - Views on News from Equitymaster
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  • Jul 30, 2002

    Punjab Tractors: Turnover down 27%

    Punjab Tractors, the second largest player in the Indian tractor segment, has posted a sharp fall in sales and profits for the first quarter ended June 2002. One of the key reasons for the fall in volume sales could be on account of destocking at the dealer end apart from subdued demand in the industry.

    (Rs m) 1QFY02 1QFY03 Change
    Net sales 2,205 1,617 -26.7%
    Other Income - - -
    Expenditure 1,785 1,333 -25.3%
    Operating Profit (EBDIT) 420 284 -32.4%
    Operating Profit Margin (%) 19.0% 17.6%  
    Interest (net) 15 33 120.0%
    Depreciation 45 45 0.0%
    Profit before Tax 360 206 -42.8%
    Tax 106 66 -37.7%
    Profit after Tax/(Loss) 254 140 -44.9%
    Net profit margin (%) 11.5% 8.7%  
    No. of Shares (m) 60.8 60.8  
    Diluted Earnings per share* 16.7 9.2  
    P/E Ratio (x)   15.9  
    (* annualised)      

    Before analysing 1QFY03 results of the company, a brief view of the industry status is essential. Tractor manufacturers have been on a destocking spree over the last six months in order to reduce the inventory in the system. The estimated inventory level in the sector is estimated to be in the range of 80,000-120,000 units, which represents 50% of annual sales of the sector. As per one of the leading players, inventory was reduced by around 3,000 units in the first two months of the current financial year i.e. April and May 2002. Excess inventory in the sector has resulted in higher credit sales in order to push volumes and price-led competition. Punjab Tractors also seems to have undertaken a similar exercise.

    The company's unit sales have declined by as much as 34% in 1QFY03 to 7,003 units. Average monthly sales has been in the range of 2,200 as against 3,100 units in a normal year. This, when compared with the industry performance, seems to indicate a destocking exercise. Industry sales are lower by 5% to 44,510 units for 1QFY03. Consequently, Punjab Tractor's market share in the tractor segment has come down from around 21%, as of March 2002 to 16% as of June 2002. Besides, tractor demand has remained subdued in the first quarter due to postponement of fresh purchases in light of drought-like situation in select Northern and Western states where Punjab Tractors traditonally, has a strong foothold.

    Destocking exercise?
    (Nos) Apr-02 May-02 Jun-02 Total
    Industry 11,265 15,311 17,934 44,510
    % YoY change -10.7% 0.3% -5.1% -4.8%
    Punjab Tractors 2,403 2,150 2,450 7,003
    % YoY change -22.9% -37.2% -39.0% -33.6%
    % market share 21.3% 14.0% 13.7% 15.7%
    Source: M&M website

    Despite a 34% drop in unit sales, turnover has fallen only by 27% to Rs 1,617 m. This could be on account of favorable mix towards higher HP sales and improved performance of its other divisions like harvestor combines and castings. Operating margins are lower by 140 basis points in 1QFY03 due to higher raw material costs. Though raw material expenses are lower by 25%, as a percentage of sales, it has gone up by 70 basis points thus exercising a downward pressure at the operating level. Net interest expenses have almost doubled in 1QFY03, which could be attributed to higher working capital requirements to fund credit sales.

    The stock currently trades at Rs 146 implying a P/E multiple of 15.9x 1QFY03 annualised earnings. Though the company seems to have taken a cautious stand, other manufacturers continue to push for volumes. It is estimated that adjustment of excess inventory in the system will take atleast another 15 months. This combined with the possibility of inadequate rainfall in key states is expected to have a negative impact on tractor industry in the near-term. However, on YoY basis, we expect Punjab Tractors to improve its market share in FY03. The stock has exhibited volatility off late post the announcement of Punjab Government to sell its stake in the company through a divestment exercise. While fundamentals do not look promising for the current fiscal, any positive developments on the divestment front will drive valuations on the bourses.



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