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Displaying strength in adversity - Views on News from Equitymaster
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  • Dec 2, 2000

    Displaying strength in adversity

    Punjab Tractors Ltd (PTL), India's second largest tractor manufacturer has seen its share price languish since the past one year, as profits slumped in the first half of fiscal year 2001 (1HFY01). The slowdown in the agricultural sector in the last 3 years and higher inventory levels have resulted in declining volumes. There seems to be no respite in the second half of fiscal year 2001 (2HFY01) as well, as this year's monsoons are unevenly distributed.

    Though the current year is not good for PTL, its past history suggests that it has resilience to get through these rough times. PTL was set up by the Punjab State Industrial Development Corporation to make India's first fully indigenised tractor in 1971. There has been no looking back since then. The company today boasts of a strong research and development base and continues to produce tractors made indigenously.

    Due to its stable and well thought out strategies and conservative financing policies, PTL has the best margins not only in the tractor industry but also in the automobile sector. In terms of return on equity and assets, PTL comes up tops as compared to its peers, who lag far behind on these parameters. PTL's management is rated one of the best in the industry.

    FY2000 Gross margins (%) ROE (%) ROA (%)
    Punjab Tractors 16.7% 35.8% 28.4%
    Mahindra & Mahindra 10.9% 14.2% 71.0%
    Escorts 9.1% 11.9% 4.9%
    Bajaj Auto 12.5% 19.2% 11.3%
    Telco 5.3% 2.4% 0.9%

    Another forte of PTL is that all its expansion and research efforts have been financed by internal accruals. Its recent expansion of its capacity to 60,000 tractors was financed entirely through its internal accruals.

    In the short term, the current fiscal does look dull with PTL's volumes declining by 13.6 percent in 1HFY01, as against the industry volume decline of 11.9 percent. Consequently, PTL's market share fell from 19 percent to 18.2 percent in 1HFY01. However, the loss in market share came in the first quarter as other players, in a bid to aggressively push sales, resorted to price cuts. They also extended credit and gave products on advance.

    PTL has always avoided giving credit, though this has slowed down its volumes in the short term. However, facing the heat from competition, in fiscal year 2000 (FY00), PTL extended selective credit for the first time in 12 years. This resulted in higher working capital needs, increasing its net working capital to sales to 18.3 percent in FY00 from 9.6 percent in FY99.

    (Rs m) 1HFY00 1HFY01 Change
    Sales 5,473.3 4,955.2 -9.5%
    Other Income 97 17 -82.9%
    Expenditure 4,523.3 4,089.8 -9.6%
    Operating Profit (EBDIT) 950 865 -8.9%
    Operating Profit Margin (%) 17.4% 17.5%  
    Interest 0.0 0.0  
    Depreciation 70.0 88.0 25.7%
    Profit before Tax 977.0 794.0 -18.7%
    Other Adjustments - -  
    Tax 272.0 238.0 -12.5%
    Profit after Tax/(Loss) 705.0 556.0 -21.1%
    Net profit margin (%) 12.9% 11.2%  

    It is in adverse situations like this that PTL's true strengths stand out. PTL came back strongly in the second quarter. The company's market share went up from 17.7 percent to 18.7 percent during this quarter. What's more, it managed to improve its operating margins from 17.4 percent in the 1HFY00 to 17.5 percent in the 1HFY01. Another positive was that the company reduced their inventory levels since the past few months. In the past year while the tractor industry had an average inventory level of 2 to 3 months, PTL's inventories were less than a month. In July 2000, the company has seen a positive growth in volumes by 6 percent YoY and by 4 percent YoY in August 2000. Currently its sales are primary in nature, as stocks with dealers are depleted. This is a positive sign.

    PTL shifting focus to higher HP
      FY00 1QFY01
    Below 30 HP 13.0% 7.0%
    31-40 HP 70.0% 63.0%
    41-50 HP 6.0% 20.0%
    above 51 HP 11.0% 10.0%

    PTL has a very large presence in the 31-40 HP (horse power) segment. This segment accounted for 70 percent of its total volumes in FY00. Though this segment has been the mainstay of the tractor industry, in the past 2 years higher growth was reported in the below 30 HP and the 41-50 HP segments. As a result, PTL shifted its focus to the higher HP segment by launching its Swaraj 744 in the 48 HP category. The company has received a good response for this model, which is a high margin one as compared to its other models. It also plans to relaunch its popular, 60 HP brand Swaraj 855, having over 50 percent market share in the 50 HP and above category.

    Its relatively smaller presence in the 21-30 HP segment, has turned out to be a boon in disguise. While other players like Eicher faced tough times due to hike in excise duty in this segment, PTL was relatively unaffected due to its low presence here.

    Punjab Tractor's market share
    (%) FY00 FY99
    Uttar Pradesh 22 23
    Punjab 12 13
    Haryana 17 18
    Rajasthan 12 13
    Maharashtra 19 18
    Andhra Pradesh 17 18
    Bihar 22 17
    Tamil Nadu 16 13
    Source: TMA    

    The company continues to have a strong presence in the northern markets and derives 51 percent of its sales from here. But in light of the increasing competition, PTL has started to focus on increasing its presence across the country. It has expanded its dealer network by opening more dealerships in the East, West and South. As a result, its market share in these regions went up in FY00. On the flip side, this resulted in a loss of market share in its northern markets of Punjab and Uttar Pradesh. But in the long run, this strategy of spreading its network will stand it in good stead.

    Though the industry is in a slump currently, PTL is well geared to reap the rewards when the recovery does set in. Its low valuations, negligible debt levels, profitable product mix and high operating margins are signs of a company with a vision.



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