Punjab Tractors: Woes continue - Views on News from Equitymaster

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Punjab Tractors: Woes continue

Aug 1, 2003

There seems to be no respite for Punjab Tractors, one of the leading players in the Indian tractor market. While revenues have fallen by 26%, net profit has declined at an even faster rate of 59%. The poor performance could be attributed to subdued demand for tractor in rural areas and the ongoing de-stocking exercise.

(Rs m)1QFY031QFY04Change
Net sales 1,617 1,194 -26.2%
Other Income - - -
Expenditure 1,333 1,047 -21.5%
Operating Profit (EBDIT) 284 147 -48.2%
Operating Profit Margin (%)17.6%12.3% 
Interest (net) 33 32 -3.0%
Depreciation 45 40 -11.1%
Profit before Tax 206 75 -63.6%
Tax 66 18 -72.7%
Profit after Tax/(Loss) 140 57 -59.3%
Net profit margin (%)8.7%4.8% 
No. of Shares (m) 60.8 60.8  
Diluted Earnings per share* 9.2 3.8  
P/E Ratio (x)  36.8  
(* annualised)   

Total volume sales in 1QFY04 is lower by 22% to 5,445 units. This is higher compared to the industry fall of 17%, as a result of which, market share of the company has come down to 14% in 1QFY04 (15% in 1QFY03). Two things have been affecting tractor majors. Firstly, demand has remained subdued in the last three years due to uneven and inconsistent rainfall. Secondly, with demand not showing any signs of improvement, manufacturers continue to correct inventory at the dealers end. The inventory estimates for the industry stands at around 45,000 units (3 months of current industry sales).

Operating margins have also suffered significantly in 1QFY04 due to lower volumes and pressure on realisations. This has translated into a 48% decline in operating profits. Despite a dip in interest and depreciation charges, net profit has more than halved in 1QFY04. The performance of the company is below our initial estimates.

Going down…
(Nos)Apr-02May-02Jun-02Total
Industry 10,721 12,984 15,251 38,956
% YoY change-20.7%-15.8%-15.8%-17.2%
Punjab Tractors 1,860 1,850 1,735 5,445
% YoY change-22.6%-14.0%-29.2%-22.2%
% market share17.3%14.2%11.4%14.0%
Source: M&M website

Among recent developments, as per the disinvestment programme, the Punjab Government has sold its stake to CDC Capital Partners for a consideration of Rs 2.2 bn (Rs 153 per share). With others majors backing out of the divestment process at the last moment, CDC has acquired the company at a relatively low price (just to highlight the long-term industry growth, volumes have grown at a CAGR of 7% in the last 25 years). However, it remains to be seen how CDC takes the company forward.

The stock currently trades at Rs 138 implying a P/E multiple of 38.6x annualised 1QFY04 earnings. While the 1QFY04 performance has been dismal, we expect industry volumes to show some signs of improvement in 2HFY04. This should benefit Punjab Tractors.

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