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Raghuvir Srinivasan

Well-placed to capitalise on the upswing

PUNJAB Tractors Ltd's (PTL) performance in the fourth quarter of 2003-04 clearly reflects the turnaround in the tractors industry which was languishing in a demand recession for the last two years.

The doubling of PTL's pre-tax profit to Rs 20.76 crore and the impressive 62 per cent growth in sales to Rs 183.84 crore during the fourth quarter are a direct result of favourable market conditions.

However, the impressive performance in the third and fourth quarters was not enough to compensate for the dull show of the first two quarters. As a result, PTL could show barely any growth for fiscal 2003-04; in fact, post-tax earnings were marginally lower compared to 2002-03.

The second half of fiscal 2003-04 proved to be a good one for the company as the effects of the favourable monsoon last year began to trickle down into tractor demand. It is interesting to note that PTL's pre-tax profits in the second half at Rs 39.76 crore is more than double the Rs 15.6 crore registered by the company in the first half. While the return of demand is encouraging, there is a spot of worry in PTL's performance in the fourth quarter so far as operating margins go. Compared to the operating margin of 15.5 per cent in the fourth quarter of 2002-03, PTL's margins for the same period in 2003-04 dropped to 13.25 per cent. This is obviously due to the rising cost of inputs such as steel (which accounts for 70 per cent of the raw material cost) as also the inability of the company to pass them on to the customers fully. Given that farmers were just beginning to feel the money in their hands after last year's monsoon, passing on hefty price increases may have proved counterproductive.

The knock from higher input costs was, however, offset by some prudent financial management that saw interest costs drop by a sharp 40 per cent in the fourth quarter and by 31 per cent for the entire year. The company's conservative approach to business as, for instance, inventory management, was also a factor that counter-balanced the ill-effects of the downslide in the industry.

The outlook for the near-term appears bright for the tractor industry. Given that agriculture is coming in for prime focus from this government, one can expect some farmer-friendly proposals such as increased lending at subsidised rates for farm automation and higher procurement prices, which should work to the advantage of those such as PTL.

The company has also revised prices upwards last month passing on some more of the rise in steel prices. This, along with resurgent demand, should ensure that PTL's margins are protected. Assuming the monsoon turns out to be as bountiful as predicted, demand for tractors will likely shoot up from the third quarter of this fiscal.

An overall growth of about 10 per cent for this fiscal appears a strong possibility and this will take total industry sales past the two-lakh mark. PTL, with a capacity of 60,000 tractors (Production in 2003-04: 25,600) is well positioned to capitalise on the expected upswing.

While competition is expected to be tough as ever, the two new models launched by PTL last year in the 41 and 34 HP categories should stand it in good stead.

The current price of Rs 214 for the PTL stock discounts 2003-04 earnings by 31 times. Existing shareholders can stay invested while fresh investment can be considered at any declines that may happen corresponding to overall market trends.

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