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Punjab Tractors: Riding the wave

Oct 14, 2004

Performance Summary
Punjab Tractors, one of India’s leading manufacturers of tractors has reported robust 2QFY05 results. During the quarter, while the topline of the company has grown at a rate of 49% YoY, the growth in bottomline is even higher at 77%, thanks mainly to improvement in other income and savings on the interest front.

What is the company’s business?
Punjab Tractors is the second largest manufacturer of tractors in the country with a total market share of 13% in FY04. Though it is a dominant player in the states of Punjab and Haryana, it has diversified into other regions as well. The company also manufactures forklifts, castings, agricultural implements and self-propelled harvester combines.

(Rs m) 2QFY04 2QFY05 Change 1HFY04 1HFY05 Change
Net sales 1,276 1,897 48.7% 2,470 3,717 50.5%
Expenditure 1,155 1,717 48.7% 2,202 3,325 51.0%
Operating profit (EBDITA) 121 180 48.8% 268 392 46.3%
EBDITA margin (%) 9.5% 9.5%   10.9% 10.5%  
Other income 32 43 34.4% 32 43 34.4%
Interest (net) 32 18 -43.8% 64 38 -40.6%
Depreciation 40 40 0.0% 80 80 0.0%
Profit before tax 81 165 103.7% 156 317 103.2%
Tax 20 57 185.0% 38 109 186.8%
Profit after tax/(loss) 61 108 77.0% 118 208 76.3%
Net profit margin (%) 4.8% 5.7%   4.8% 5.6%  
No. of shares (m) 60.8 60.8   60.8 60.8  
Diluted earnings per share (Rs)* 4.0 7.1   3.9 6.8  
Price to earnings ratio (x)         28.8  
(* annualised)            

What has driven performance in 2QFY05?
Industry coming out of the trough: During the quarter, the company managed to sell 27% more tractors than what it sold in the corresponding quarter last year. However, on account of better product-mix, whereby tractors in the higher HP range constituted a significant chunk of the overall volumes, the growth in value terms has been much higher at 49%. Also, the excise duty benefits handed out to the industry earlier this year by the central government has helped matters. With the late recovery in monsoons, volumes are expected to remain robust for the second half and consequently, we will have to revise our sales numbers upwards.

  • Higher utilisation level supports margin: Despite higher raw material costs, the pressure at the operating level has been negligible and the company has been able to maintain its operating margins at the last year’s levels. Higher capacity utilisation and improved product-mix has helped it to maintain the status quo on the operating margins. With the steel prices showing no signs of softening, the margin pressure is likely to persist for the remaining part of this fiscal.

    Cost break-up…
    (Rs m) 2QFY04 2QFY05 %Change 1HFY04 1HFY05 %Change
    Raw materials 865 1,394 61.2% 1634 2673 63.6%
    % sales 67.8% 73.5%   66.2% 71.9%  
    Staff cost 165 175 6.1% 329 340 3.3%
    % sales 12.9% 9.2%   13.3% 9.1%  
    Other expenses 125 148 18.4% 239 312 30.5%
    % sales 9.8% 7.8%   9.7% 8.4%  

  • Net profits: A robust 34% rise in other income and lower interest expense has resulted into the bottomline growing at a significantly higher rate than the topline. It has to be remembered that in the previous fiscal, the company had retired debt to the tune of Rs 645 m (largely borrowed to meet working capital requirements. This has helped the company to pare its interest expenses significantly.

    What to expect?
    At Rs 197, the stock is trading at a healthy P/E multiple of 28.8 times annualised 1HFY05 earnings. Although the growth in volumes is expected to remain robust, the valuations seem to have run ahead of fundamentals and as a consequence, the risk reward ratio does not seem to be favour investors currently.

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