First Global Finance

Justified premium

Financial year 1996-97 was a good year with strong demand for PTL's tractors. PTL's volume growth at 25.5% exceeded the industry volume growth of 15.5%. Sales revenue grew by 33.2%. The company was helped by the sluggish steel and tyre prices. In addition, effective cost controls and improved productivity helped PTL contain costs.

With PTL's debt equity ratio of just 0.11, interest costs were low. Effective tax rate came down because of the 3% reduction in surcharge. All these factors helped the company improve on its margins (operating profit margins improved from 12.6% to 13.7%, while net profit margins improved from 8.4% to 9.3%). The net profit at Rs 56.31 crore was 47.4% higher than last year. The EPS works out to Rs 27.8.

Outlook: Punjab Tractors sales growth has been constrained by capacity. Sales at 40,300 tractors should see a strong growth of 22% (YOY) during the current year. Most players in the tractor industry are expanding capacities leading to an oversupply and affecting pricing power. with demand being strong for PTL, it will be affected to a lesser extent.

April-May sales: In the current year, demand has been strong in the northern market. During the first two months, PTL sales growth of 27.6% far outstripped the industry's growth of 19%. The company's market share improved by a percentage point higher to 15.6%. The strong demand for PTL tractors should see it emerge as the fastest growing tractor company in financial year 1997-98.

Valuation: We expect net sales revenue to increase by 29% and net profit by 36% during financial year 1997-98. This translates into an earnings per share of Rs 38. The scrip at Rs 672 discounts financial year 1996-97 and financial year 1997-98 earnings by 24.2 (x) and 17.7 (x).

This represents a premium of 50% and 32% during the next two years. The scrip deserves to quote at a premium given the company's strong volume growth, excellent management and well-planned capacity expansion programme. The scrip has appreciated by nearly 60% over the past four months. We recommend Hold.