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Punjab Tractors: Poor harvest - Views on News from Equitymaster
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Punjab Tractors: Poor harvest
Jul 30, 2007

Performance summary
  • Subdued demand conditions lead to a 29% YoY decline in topline

  • Huge margin erosion to the tune of 860 basis points as operating profits fall 78% YoY

  • Bottomline suffers an equally brutal fall of 81% YoY

(Rs m) 1QFY07 1QFY08 Change
Net sales 2,436 1,739 -28.6%
Expenditure 2,135 1,674 -21.6%
Operating profit (EBDITA) 301 65 -78.4%
EBDITA margin (%) 12.4% 3.7%  
Other income 2 - -100.0%
Interest (net) (5) 20  
Depreciation 38 41 7.9%
Profit before tax 260 44 -83.1%
Extraordinary income/(expense) - -  
Tax 83 11 -86.7%
Profit after tax/(loss) 177 33 -81.4%
Net profit margin (%) 7.3% 1.9%  
No. of shares (m) 60.8 60.8  
Diluted earnings per share (Rs)* 11.7 2.2  
Price to earnings ratio (x)**   25.4  
* 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 12% market share in FY06. During the period between FY03 and FY06, the company’s volumes have grown at a compounded rate of 9%, though underperforming the industry that has grown at a rate of 20% during the same period. The company’s fortunes are likely to turn favorable as M&M, India’s largest tractor manufacturer acquired a 43.3% stake in the company in FY07 for a sum close to Rs 14 bn. It subsequently made an open offer to buy an additional 20% stake in the company.

What has driven performance in 1QFY08?
Struggling with volumes: After maintaining a positive growth rate for four consecutive years, the industry finally seems to be heading for a slowdown, as volumes were lower by about 4% YoY during 1QFY08. Punjab Tractors seems to have underperformed the industry as decline in topline at 29% YoY was significantly lower. However, we believe the sales at the dealer end to be slightly higher as the company continued with its efforts at rationalizing its channel stock.

Huge margin contraction: While the company remains a benchmark in material cost management, also evident from reduction in raw material costs as a percentage of sales during FY08, the same cannot be said about its staff costs and other expenses. These two cost heads accounted for a significantly greater proportion of sales in 1QFY08 and as a consequence, operating margins tumbled by a huge 860 basis points.

cost break up
(Rs m) 1QFY07 1QFY08 Change
Raw materials 1,784 1,254 -29.7%
% sales 73.2% 72.1%  
Staff cost 202 237 17.3%
% sales 8.3% 13.6%  
Other expenses 149 183 22.8%
% sales 6.1% 10.5%  

As the company is operating at significantly below its full capacity, there was no need to increase it further and hence, depreciation growth has come in at a modest 8% YoY. The company also recorded an interest income in the current quarter and this helped it restrict any further fall in bottomline. For the quarter, the company’s bottomline shrunk by a significant 81% YoY.

What to expect?
The stock is currently trading at Rs 263, implying a price to cash flow of 10 times its estimated FY10 cash flow. Our projections hinge upon the ability of M&M to improve the company’s capacity utilisation and enhance its operating margins. These operational improvements we believe, were the basis of M&M’s offer price of Rs 360 per share. Considering the stock is trading at a fair discount to the same, it appears a good ‘HOLD’ from a medium term perspective. However, the current decline in volumes may result into the investor sentiment turning negative towards the sector.

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