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Punjab Tractors: The terrific turnaround continues - Views on News from Equitymaster

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Punjab Tractors: The terrific turnaround continues
Nov 3, 2008

Performance summary
  • Topline jumps an impressive 49% YoY during the quarter on the back of strong volume growth.

  • Operating margins jump by 2.4% and push operating profits higher by 97% YoY on the back of lower staff costs and other expenses.

  • PAT jumps nearly three fold as high other income and low depreciation charges add further meat to the strong operating performance



(Rs m) 2QFY08 2QFY09 Change 1HFY08 1HFY09 Change
Net sales 2,069 3,080 48.9% 3,808 6,221 63.4%
Expenditure 1,914 2,774 44.9% 3,588 5,652 57.5%
Operating profit (EBDITA) 155 306 97.2% 220 569 158.5%
EBDITA margin (%) 7.5% 9.9%   5.8% 9.1%  
Other income - 60   - 86  
Interest (net) (35) (69) 97.1% (55) (122) 121.8%
Depreciation 41 44 8.0% 82 66 -19.1%
Profit before tax 149 390 161.9% 193 710 268.0%
Extraordinary income/(expense) - -   - -  
Tax 51 117 130.0% 62 213 243.4%
Profit after tax/(loss) 98 273 178.5% 131 497 279.6%
Net profit margin (%) 4.7% 8.9%   3.4% 8.0%  
No. of shares (m) 60.8 60.8     60.8  
Diluted earnings per share (Rs)*         16.8  
Price to earnings ratio (x)*         7.2  
(* on trailing twelve months earnings)

What has driven performance in 2QFY09?
  • The robust growth in topline was led by tractor sales, which improved 41% YoY, significantly higher than the industry growth rate of around 7% YoY. It should be noted that during same quarter last year, the company had recorded a decline of 7% YoY in its topline owing to poor sales. Hence, a low base also played its part in giving the topline a significant boost. Furthermore, with M&M taking over the reins of the company, the experience and the reach of the former seems to have been instrumental in effecting such a quick turnaround as well as the strong industry out performance of the company.

  • Operating profits have nearly doubled for the company on the back of less than proportionate increase in staff costs and other expenses. Having said that, given the current high commodity price environment, raw material expenses continued to rise relentlessly, growing at a faster rate than the topline. The biggest boost to operating margins has come from staff costs, which although increasing by 9% on a YoY basis, have come off by 3.2% as a percentage of sales.

    Cost break-up…
    (Rs m) 2QFY08 2QFY09 Change
    Raw materials 1,481 2,233 50.8%
    % sales 71.6% 72.5%  
    Staff cost 249 272 9.3%
    % sales 12.0% 8.8%  
    Other expenditure 184 269 46.2%
    % sales 8.9% 8.7%  

  • The company’s net profits have jumped nearly three fold on a YoY basis. Besides a strong operating performance, benign depreciation charges and income on its surplus funds have been the reasons behind the company’s stupendous performance at the net profit level. Important to add that the company has a lot of spare capacity available and hence it did not have to undertake huge capex spending. This led to the depreciation increasing only marginally by 8% YoY. Furthermore, with the company seemingly in a net cash position, income from surplus funds has helped further boost bottomline.

    What to expect?
      The stock is currently trading at Rs 121, implying a multiple of 5.3 times our estimated FY11 cash flow. We are enthused with the performance of the company during the quarter under consideration and this strengthens our belief that the company will continue to report robust numbers under the new management. Spare capacity, low capex needs and a strong balance sheet makes Punjab Tractors an attractive low risk bet in the Indian auto space from a medium term perspective.

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