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Punjab Tractors: Where to from here? - Views on News from Equitymaster
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Punjab Tractors: Where to from here?
Oct 18, 2005

Introduction to results
Punjab Tractors announced its 2QFY06 results late yesterday. For the second quarter, while the topline has grown by a modest 12% YoY, the operating profits have grown by a robust 44% YoY, aided by improving operating efficiency as evident form a mere 9% YoY increase in the operating expenses. The bottomline has also grown at a much faster pace aided by a reduction in effective tax rate for the company.

Financial snapshot
(Rs m) 2QFY05 2QFY06 Change 1HFY05 1HFY06 Change
Net sales 1,897 2121 11.8% 3,717 4,501 21.1%
Expenditure 1,717 1863 8.5% 3,325 3,988 19.9%
Operating profit (EBDITA) 180 258 43.3% 392 513 30.9%
EBDITA margin (%) 9.5% 12.2%   10.5% 11.4%  
Other income 43 44 2.3% 43 44 2.3%
Interest (net) 18 18 0.0% 38 33 -13.2%
Depreciation 40 38 -5.0% 80 78 -2.5%
Profit before tax 165 246 49.1% 317 446 40.7%
Extraordinary item - -   - 613  
Tax 57 78 36.8% 109 184 68.8%
Profit after tax/(loss) 108 168 55.6% 208 875 320.7%
Net profit margin (%) 5.7% 7.9%   5.6% 19.4%  
No. of shares (m) 60.8 60.8   60.8 60.8  
Diluted earnings per share (Rs)* 7.1 11.1   6.8 28.8  
Price to earnings ratio (x)         6.9  
(* annualised)            

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 the performance in 2QFY06?
Topline underperformance continues: Punjab Tractors has been facing pressure from its peers like M&M and Sonalika on the volume front. This has affected its market share and the company has continued to under perform the industry growth. During the first half of the current year, while the tractor industry has grown by around 14% YoY, Punjab Tractors has managed to register a growth in the region of 10% YoY. It should be noted that Punjab Tractors has been loosing its market share since FY01. To give a perspective, the company’s market share, which stood at 18% in FY01, reduced to 12% in FY05.

Cost break-up…
(Rs m) 2QFY05 2QFY06 %Change 1HFY05 1HFY06 %Change
Raw materials 1,394 1553 11.4% 2673 3,394 27.0%
% sales 73.5% 73.2%   71.9% 75.4%  
Staff cost 175 182 4.0% 340 365 7.4%
% sales 9.2% 8.6%   9.1% 8.1%  
Other expenses 148 128 -13.5% 312 266 -14.7%
% sales 7.8% 6.0%   8.4% 5.9%  

Operating margins – a good show: Operating margins have recorded a significant improvement of 270 basis points during the current quarter. This is been on account of cost control initiatives undertaken by the company in the wake of rising competition. It is commendable that the company has been able to reduce the impact of rising raw material costs especially when other players have been witnessing a squeeze in operating margins on account of rising steel prices. Similarly, the restructuring activity undertaken by the company has started yielding results as evident from a reduction in staff cost and other expenses (as a % of sales).

The tax effect: Punjab Tractors’ bottomline has grown at a much faster rate of 56% and 320% in 2QFY06 and 1HFY06 respectively. For 2QFY06, this has been primarily on account of reduction in the effective tax rate by 400 basis points coupled with reduction in depreciation charge. For 1HFY06, the sudden jump in the net profit is because of an extra ordinary income of Rs 613 m arising consequent to the sale of stake in one of the group companies.

What to expect?
At Rs 198, the stock is trading at 6.9 times its 2QFY06 annualised earnings. With easy availability of agricultural credit, increasing awareness among the rural populace and normal monsoons in the current fiscal, the tractor industry is poised to witness another year of good growth. Further, post the change in management, there has been an improved performance by the company with the management having adopted a proactive strategy. However, having said that, we believe that the company can face pricing pressure going forward. Apart from this, as stated earlier, the company has been loosing market share over the past few years, which in our opinion is a key cause of concern. Further, the topline growth is also steadily falling over last few quarters (see adjacent chart). On balance, at current price, we believe the risk to reward ratio is skewed in favour of latter. To that extent, investors should exercise caution.

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