Punjab Tractors: Buy

Recommendation: Buy

Raghuvir Srinivasan

PUNJAB Tractors Ltd's (PTL) performance in 2000-01 is hardly surprising, given the overall trends in the tractor industry.

The company reported a 5.15 per cent drop in the top-line to Rs 964.48 crore and a 15.56 per cent fall in the bottomline to Rs 112.52 crore for the year-ended March 31, 2001.

Punjab Tractor's sales volumes dipped 9.8 per cent in the same period to 45,712 tractors. In comparison, the overall industry volumes fell by 7.4 per cent in the same period, suggesting that PTL's drop in volumes was sharper than that of the industry. The company's growth is closely aligned to that of the overall industry and the fundamental problems afflicting the latter now cannot but have an impact on PTL.

The last year was a difficult one for the industry due in equal part to natural and man-made causes. The uneven distribution of the monsoons -- both in spread and intensity of the precipitation -- was certainly a major factor in depressing tractor demand. This was compounded by the strategies of some tractor manufacturers who took refuge in pushing sales volumes at a time of a drop in demand. This strategy of flooding the market with tractors pushed realisations downwards across all brands. While those joining in the party managed to cover up the lower realisations through higher volumes, companies such as PTL, which opted to stay out, ended up losing market share.

The fourth quarter appears to have been particularly bad, especially in March 2001, when PTL's market share dipped to as low as 11.6 per cent from around 18.9 per cent in the April 2000-February 2001 period. Typically, automobile companies resort to pushing sales in the last quarter of the fiscal, even if it means offering steep discounts and long credit periods. This practice has spread to the tractor industry as well in the last three years. Since PTL stayed out of the dumping game, it found its own sales take a beating in that period.

There have been other problems as well. Thanks to surplus foodgrain stocks, the Government went slow on procurement in the last six months, which exerted pressure on rural incomes, especially in States such as Punjab and Haryana. This, coupled with the drought in Rajasthan, Madhya Pradesh and Gujarat, caused a shrinkage in demand for PTL since these areas are its major markets. In the last couple of years, the company has been focussing on the southern region and Maharashtra where it has built up new dealerships. But competition here is rather stiff with the likes of Tafe, Escorts and Mahindra and Mahindra.

PTL's bottomline was also affected by the lower contribution from `other income' -- income from dividends was Rs 2.03 crore compared to Rs 8.14 crore the previous year. Net interest income also fell to Rs 0.07 crore from Rs 2.97 crore- outflow as interest has obviously been higher than interest income.

PTL probably had to offer longer credit period to hold on to the market which pushed up its interest costs. Besides, there has also been an extra write-off of Rs 3.11 crore, being the depreciation on investments made by the company which depressed the bottomline further. That the company has managed to hold costs is evident from the fact that operating margins have remained stable at 19.27 per cent (19.20 per cent) in spite of a fall in the overall turnover.

Trends in the first quarter of this fiscal point to a continuation of the slowdown in the industry's growth rate. The key, of course, would be the progress of the monsoons, which has been good till now. It is early days yet and the success of the monsoon will be known only over the next couple of months. It may be at least the third quarter of this fiscal by when the beneficial impact of the monsoons is felt by tractor companies. Having decided to stay out of the market-dumping game, PTL may have to contend with yet another fiscal of lower-than-industry growth if demand fails to pick up.

The success of the high horsepower models introduced by PTL in 1999 is encouraging, considering that market volumes are migrating towards the 40 hp range. A major part of the demand in the southern market, where PTL is hoping to make a mark, comes from the 40 hp range. The entry of John Deere and Same lends a qualitatively higher edge to competition but PTL, given its strong balance-sheet and brand-equity should be able to hold its own. Shareholders can hold on to the PTL stock, which trades at Rs 180-190, while fresh acquisition can be considered at marginal declines from the present levels.