• APRIL 22, 2003

Punjab Tractors: Is the worst over?

Punjab Tractors, the second largest tractor manufacturer in the country, has posted a sharp 58% decline in net profit and a 39% fall in revenues for the full year ended March 2003. This has come in the wake of not only weakness in demand, but is also led by the accelerated inventory correction exercise undertaken by the company during the year. The correction exercise was due for more than a year and a half.

(Rs m) 4QFY02 4QFY03 Change FY02 FY03 Change
Net sales 1,967 1,135 -42.3% 8,882 5,455 -38.6%
Other Income 2 - - 39 41 5.1%
Expenditure 1,616 953 -41.0% 7,188 4,560 -36.6%
Operating Profit (EBDIT) 351 182 -48.1% 1,694 895 -47.2%
Operating Profit Margin (%) 17.8% 16.0%   19.1% 16.4%  
Interest (net) 51 32 -37.3% 119 142 19.3%
Depreciation 48 46 -4.2% 179 172 -3.9%
Profit before Tax 254 104 -59.1% 1,435 622 -56.7%
Tax 84 29 -65.5% 435 199 -54.3%
Profit after Tax/(Loss) 170 75 -55.9% 1,000 423 -57.7%
Net profit margin (%) 8.6% 6.6%   11.3% 7.8%  
No. of Shares (m) 60.8 60.8   60.8 60.8  
Diluted Earnings per share (Rs)* 11.2 4.9   16.5 7.0  
P/E ratio (x)         17.8  
(* annualised)            

To highlight the industry performance in brief, total industry sales was lower by 23% during FY03. This is after a 17% decline in volumes in FY02. To put things in perspective, after peaking at around 273,000 units in FY00, sales have come down to less than 155,000 units in FY03. The magnitude of the fall has been significant because of various reasons. Monsoons have faired poorly in the last three years (especially the period between July-September), which has affected food grain output (estimated at 187 MT, the lowest since FY96). Consequently, tractor demand, which is linked to the performance of the rural economy, has suffered.

Secondly, the decline is also a factor of alignment of dealer inventory by tractor manufacturers'. But why would a inventory correction exercise at the dealer level result in a drastic fall in sales of the company? Because volume sales here represents despatches at the wholesale level (i.e. manufacturers to dealers). With capacity almost doubling in the last six years, especially after the entry of John Deere and New Holland, there has been a drastic inventory pile up. Such expansion has come at a time when tractor demand itself was on the decline. A combination of all the factors has resulted in the tractor manufacturers association (TMA) asking its members to take corrective steps and reduce inventory. From as high as 100,000 units, industry inventory has come down to an estimated 45,000-50,000 units currently (1/3rd of tractor sales in FY03).

Given this backdrop, Punjab Tractors has also suffered with total volumes lower by 40% for the first eleven months ended February 2003. That said, after going overboard in FY02 (debtor days increased to 171 days in FY02 from 97 days in FY01, which means that the company was relying heavily on credit sales to keep volume growth ticking), the company started its correction exercise in January 2002 and since then, it has been a southbound trend on a monthly basis. Despite the drastic fall in units sold, operating margins have been maintained at 16% level, which is commendable. The rise in interest cost has to be viewed with higher demand for short-term debt to meet working capital requirements. Net profit for FY03 stands at Rs 423 m as against our estimate of Rs 475 m.

The stock currently trades at Rs 123 implying a P/E multiple of 17.8x FY03E earnings. As far as the future growth prospects of the company is concerned, we expect the correction phase to last for atleast another six months. For demand recovery, the importance of a good monsoon cannot be understated. But even this has come under cloud with the meteorological department expecting a less than normal monsoon for the coming year. While the industry is close to the bottom of the cycle, the near-term trigger seems to be missing. This could continue to keep investors' on a cautionary mode.

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