The Hindu Business Line : Punjab Tractors: Hold

The impressive line- up of suitors and the prospect of the acquirer securing management control raise hopes of an attractive valuation for the stock

The Swaraj brand carries good royalty.

The Punjab Tractors Ltd. (PTL) stock is in play. With more than half-a-dozen suitors lining up for the equity put on the block by two major shareholders, private equity firm Actis and the Burmans of Dabur, the stock has gained about 27 per cent since February 1. After touching a peak of Rs 342, the stock now trades at Rs 316. Shareholders can continue to hold the stock for reasons elucidated below. Fresh exposure, however, can be avoided as returns from current levels may not be significant enough to justify the risks assumed.

Up for grabs

Actis, which holds 29 per cent in PTL, has decided to exit the company and so have the Burmans, who hold 14.5 per cent. Bids are currently on and the biggest and the best companies of the vehicle manufacturing industry have been attracted to the sale. Tractor market leader, Mahindra and Mahindra, Ashok Leyland, Tractors and Farm Equipment Ltd (TAFE), International Tractors (Sonalika), and Escorts have confirmed that they are in the race.

Tata Motors, in association with Ford New Holland of the Fiat group, is also said to be interested though the company has not officially confirmed if it has put in a bid. Apart from these, a private equity combine headed by the former head of PTL, Mr Yash Mahajan, is also trying its luck at picking up the stake on offer.

What makes the sale significant is that the successful bidder will get management control over PTL. The stakes of Actis and Burmans together add up to 43.5 per cent and the acquirer will have to make an open offer, which, assuming it is for the minimum 20 per cent and successful, will take his stake to at least 63.5 per cent.

Why the rush?

PTL is an established and strong player in the tractor industry and its Swaraj brand commands big royalty in the major tractor markets of Punjab, Haryana, Rajasthan and Uttar Pradesh. Though in recent times its market share has whittled down to just 9 per cent from over 15 per cent a few years ago, it remains a formidable player in the industry.

But those are not the only reasons why PTL is in such demand. PTL owns 14 per cent of light commercial vehicle manufacturer, Swaraj Mazda's equity, and 33 per cent stake of engine manufacturer, Swaraj Engines. Swaraj Mazda is passing through a rough patch with sales growth in the negative terrain at a time when commercial vehicle sales are booming, but it is attractive nevertheless for a bidder such as Ashok Leyland.

Swaraj Mazda presents Leyland with a line of models where it has no presence in presently; in the long run, Leyland could also be eyeing the manufacturing facility of Swaraj Mazda, in combination with Swaraj Engines, as a foothold for itself in the North .

For M&M, acquisition of PTL will catapult it to unassailable No.1 in the tractor market with a wide and deep geographic presence. TAFE is keen because it will rise to be almost on a par with leader M&M if it is able to get control over PTL. Besides, TAFE can leverage PTL in terms of product and geographical diversity as well. The logic for Tata Motors is much the same as for Ashok Leyland with the additional motivation of enabling entry into the one segment of the automobile industry where it has no presence now.

Why hold on?

And that brings us to why shareholders should hold on to the PTL stock till the logical denouement — of the bid culminating in sale. Given the strong motivational factors driving each of the bidders, the price bids are likely to be extremely competitive reflecting their desire to gain control over PTL. There will also be a control premium to the bids because the successful bidder will gain management control over the company.

Besides, PTL is a well-run company with a strong goodwill in the market and there may not be other similar capacities coming up for grabs in the near future.

Finally, what also generates confidence is that the top four bidders have deep pockets and could be willing to go the extra mile given the boom time in the automobile industry.

Given that the stock was trading at around Rs 240 before the news of the two shareholders putting up their holdings for sale came out, and accounting for the above factors, including the control premium, it is likely that the share will be valued closer to the prevailing market price.

But is there no fall side at all? Yes, there is and that is the possibility of either one or both the sellers deciding to withdraw their offers. Such an unlikely prospect could lead to a precipitous fall in PTL's stock as the current market price cannot be justified by fundamental factors alone.

The fizz in the stock in recent times is due to the stake sale and it could dissipate in no time if the sale process runs into a snag.

It will be prudent for shareholders to watch the developments closely in the run up to the sale over the next couple of weeks and act accordingly.

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