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Punjab Tractors: No respite

Oct 23, 2007

Performance summary
  • Led by poor volumes, topline during the quarter suffers a 7% YoY fall
  • Operating margins shrink by 490 basis points as staff costs and other expenses play spoilsport

  • Higher depreciation outgo adds to the woes as bottomline tumbles 46% YoY

  • Half yearly figures look no better with the bottomline falling 64% on the back of 18% fall in topline, both on a YoY basis

(Rs m) 2QFY07 2QFY08 Change 1HFY07 1HFY08 Change
Net sales 2,226 2,069 -7.1% 4,662 3,808 -18.3%
Expenditure 1,950 1,914 -1.8% 4,085 3,588 -12.2%
Operating profit (EBDITA) 276 155 -43.8% 577 220 -61.9%
EBDITA margin (%) 12.4% 7.5%   12.4% 5.8%  
Other income 40 -   42 - -100.0%
Interest (net) 8 (35)   13 (55) -523.1%
Depreciation 38 41 7.9% 76 82 7.9%
Profit before tax 270 149 -44.8% 530 193 -63.6%
Extraordinary income/(expense) - -   - -  
Tax 87 51 -41.4% 170 62 -63.5%
Profit after tax/(loss) 183 98 -46.4% 360 131 -63.6%
Net profit margin (%) 8.2% 4.7%   7.7% 3.4%  
No. of shares (m) 60.8 60.8   60.8 60.8  
Diluted earnings per share (Rs)* 12.0 6.5   11.9 4.3  
Price to earnings ratio (x)**         24.1  
(* 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 2QFY08?
Struggling with volumes: After growing in the positive for four consecutive years, the industry seems to be stuck in the midst of a slowdown. While the company’s own volumes are not known, sales at industry leader M&M were down 3% for the first half. Punjab Tractors seemed to have fared even more poorly as topline for first half is down 18% YoY while that for the quarter is down 7% YoY. The decline could also be attributable to vendor rationalization as the company is focusing on reducing inventories at the vendor level.

Margin woes persist: While the company’s operating margins are much better as compared to the first quarter where it had fallen to low single digits, it has nonetheless shrunk by 490 basis points during the 2QFY08. Although the company has maintained good control over material costs, higher staff costs and other expenses have been the main culprits behind the margin contraction.

cost break up
(Rs m) 2QFY07 2QFY08 Change
Raw materials 1,588 1,451 -8.6%
% sales 71.3% 70.1%  
Staff cost 203 249 22.7%
% sales 9.1% 12.0%  
Other expenditure 159 214 34.6%
% sales 7.1% 10.3%  

Other income has fallen to zero during the quarter but this has been compensated by a small interest income. Higher depreciation charges however, has meant that the 44% decline in operating profits gets converted to a 46% decline in bottomline.

Over the last few quarters:
Nothing seemed to be going right for the company over the last few quarters as not only the volumes fallen but margins have also suffered. However, with a new and experienced management at the helm, things should take a turn for the positive.

last few quarters
  2QFY07 3QFY07 4QFY07 1QFY08 2QFY08
Sales growth (YoY) 5.0% 2.3% -12.5% -28.6% -7.1%
OPM 12.4% 12.6% 9.0% 3.7% 7.5%
NPM 8.2% 9.3% 7.9% 1.9% 4.7%

What to expect?
The stock is currently trading at Rs 218, implying a price to cash flow of 8 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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