Displaying strength in adversity - Views on News from Equitymaster

Helping You Build Wealth With Honest Research
Since 1996. Try Now

  • MyStocks

MEMBER'S LOGINX

     
Login Failure
   
     
   
     
 
 
 
(Please do not use this option on a public machine)
 
     
 
 
 
  Sign Up | Forgot Password?  

Displaying strength in adversity

Dec 2, 2000

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.

FY2000Gross margins (%)ROE (%)ROA (%)
Punjab Tractors16.7%35.8%28.4%
Mahindra & Mahindra10.9%14.2%71.0%
Escorts9.1%11.9%4.9%
Bajaj Auto12.5%19.2%11.3%
Telco5.3%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)1HFY001HFY01Change
Sales5,473.34,955.2-9.5%
Other Income9717-82.9%
Expenditure4,523.34,089.8-9.6%
Operating Profit (EBDIT)950865-8.9%
Operating Profit Margin (%)17.4%17.5% 
Interest 0.00.0 
Depreciation70.088.025.7%
Profit before Tax977.0794.0-18.7%
Other Adjustments-- 
Tax272.0238.0-12.5%
Profit after Tax/(Loss)705.0556.0-21.1%
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
 FY001QFY01
Below 30 HP13.0%7.0%
31-40 HP70.0%63.0%
41-50 HP6.0%20.0%
above 51 HP11.0%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
(%)FY00FY99
Uttar Pradesh2223
Punjab1213
Haryana1718
Rajasthan1213
Maharashtra1918
Andhra Pradesh1718
Bihar2217
Tamil Nadu1613
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.


Equitymaster requests your view! Post a comment on "Displaying strength in adversity". Click here!

  

More Views on News

Sorry! There are no related views on news for this company/sector.

Most Popular

How the 8-Year Cycle Can Help Identify Multibaggers (Fast Profits Daily)

Sep 11, 2020

This is how you can apply the greed and fear cycle in the market to pick stocks.

Why am I Recommending Caution? (Fast Profits Daily)

Sep 9, 2020

This is why I have changed my short-term view on the market.

Why We Picked This Small-cap Stock for Our Hidden Treasure Subscribers (Profit Hunter)

Sep 17, 2020

This leading household brand will profit big time in a post covid world.

This Could Be the Best September for Auto Stocks (Profit Hunter)

Sep 11, 2020

Here's why I think this month could be a great for auto stocks.

More

Covid-19 Proof
Multibagger Stocks

Covid19 Proof Multibaggers
Get this special report, authored by Equitymaster's top analysts now!
We will never sell or rent your email id.
Please read our Terms

TRACK PUNJAB TRACTORS

  • Track your investment in PUNJAB TRACTORS with Equitymaster's Portfolio Tracker. Set live price alerts, get research alerts and more. Get access now...
  • Add To MyStocks

MARKET STATS