• OCTOBER 29, 2002

Punjab Tractors: Hard times

Punjab Tractors, in line with expectations, has posted a sharp fall in both revenues and profitability for the second quarter ended September 2002. Operating margins also have come under pressure on account of oversupply in the market.

(Rs m)2QFY022QFY03Change1HFY021HFY03Change
Sales 2,385 1,329 -44.3% 4,590 2,946 -35.8%
Other Income 37 41 10.8% 37 41 10.8%
Expenditure 1,913 1,126 -41.1% 3,698 2,459 -33.5%
Operating Profit (EBDIT) 472 203 -57.0% 892 487 -45.4%
Operating Profit Margin (%)19.8%15.3% 19.4%16.5% 
Interest 23 37 60.9% 38 70 84.2%
Depreciation 43 45 4.7% 88 90 2.3%
Profit before Tax 443 162 -63.4% 803 368 -54.2%
Tax 133 54 -59.4% 239 120 -49.8%
Profit after Tax/(Loss) 310 108 -65.2% 564 248 -56.0%
Net profit margin (%)13.0%8.1% 12.3%8.4% 
No. of Shares (eoy) (m) 60.8 60.8   60.8 60.8  
Earnings per share (Rs)* 20.4 7.1   18.6 8.2  
P/E (x)     13.6  

PTRA's performance in 1HFY03 do not come as a surprise to many. Since the tractor industry is highly reliant on the agricultural sector, poor monsoon has taken a toll on all players. As a result, the industry has been suffering from excess capacity situation with demand failing to meet expectations. Even with an estimated 50% capacity utilisation, supply still exceeds demand in the sector and as a result most players have been aggressively focusing on reducing inventory with the dealers. PTRA is no exception. While industry volumes are lower by 10% in 1HFY03, PTRA's volumes have fallen by as high as 40% to 13,000 units. Consequently, the company's market share that stood at 20% in FY02 has come down to 16% in 1HFY03. We expect the company to post around 30% fall in volume sales for FY03.

De-stocking takes toll…
('000 units)1QFY032QFY03 1HFY03 1HFY02
Industry 44.5 36.8 81.3 90.3
% YoY change-4.8%-15.4%-9.9% 
Punjab Tractors 7.0 6.0 13.0 21.5
% YoY change-33.6%-44.7%-39.3% 
PTRA market share (%)15.7%16.4%16.0%23.8%

The monthly volume performance of the tractor sector highlights the underlying fundamentals. In 1QFY03, industry volumes fell by only 5%, as manufacturers like M&M and Escorts increased capacity utilisation in anticipation of rise in demand following good farm output in FY02. However, with no recovery in sight, all tractor manufacturers are again in the process of readjusting inventory. We had mentioned in M&M's 1QFY03 analysis that the company's volume growth cannot sustain in 2QFY03. The impact is apparent with industry volumes falling by 15% in 2QFY03. PTRA, despite selling just 2,000 units per month, has however managed to increase market share in 2QFY03.

Operating margins have also declined during the quarter on account of increased competition in the sector that has triggered a price war. Also, PTRA has a commanding market share in the 41-50 BHP and above 50 BHP segments. Since realisations are higher, players like M&M, John Deere and New Holland are focusing on increasing contribution from the aforesaid segments (together accounted for 24% of industry sales in FY02). Also, with capacity utilisation falling in 1HFY03, fixed costs are spread over a lower base thus squeezing operating margins of PTRA. We expect PTRA to post 300 basis points fall in operating margins for FY03.

The rise in interest costs is primarily towards meeting short-term working capital requirement. The industry has been working on credit sales for over two years and there has been a marked rise in debtor days, including for PTRA. Just to put things in perspective, PTRA's average debtor days skyrocketed from 97 days (marginally higher than 3 months) in FY01 to 171 days in FY02 (almost six months credit). This seem to have continued in 1HFY03 and has resulted in higher interest expenses. Net profits have halved in 1HFY03 and is in line with our estimates.

The stock currently trades at Rs 111 implying a P/E multiple of 12.2x FY03E earnings. As far as future growth prospects of the sector goes, unless there is an concerted effort by tractor manufacturers to clear excess inventory that is estimated at 140,000 units, prospects are challenging for 2HFY03 and FY04. With agricultural output also expected to fall in FY03 and GDP growth estimated at 3.1% (CMIE), one will not be surprised if tractor sales remains sluggish for the next six quarters.

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