Sonalika scales capacity to produce 300,000 tractors

Firm's current capacity, which can meet half the total market demand, is more than M&M FY17 sales

Tractor maker Sonalika has scaled up its capacity to 300,000 units with the inauguration of a 200,000-unit plant at its existing site in Punjab’s Hoshiarpur. That is more than the 263,000 units sold by India’s largest player Mahindra & Mahindra (including exports) last year. Sonalika had a capacity of 100,000 units before the expansion.

Sonalika sold 81,531 tractors last year, growing almost 20 per cent. It enjoyed a strong Ebitda margin of 25 per cent and a 22 per cent growth in profit before tax to Rs 943 crore. Revenue grew 17 per cent to Rs 4,268 crore in FY17. The profit before tax growth is supported by rising volume, margins and a healthy other income arising out of the Rs 2,500-crore cash reserves. The 300,000-unit annual capacity looks big in a market with annual demand of 600,000 units. The decision to set up the plant was taken five years ago when Sonalika had an eight per cent share and was selling 40,000 units a year.

The decision to set up the new plant was taken five years ago when Sonalika had an eight per cent share and was selling 40,000 units a year.  

The first plant had a capacity of 50,000-55,000 units. The first unit was expanded to 100,000 units and a new plant was set up at with a capacity of 200,000 units.

Five years ago Mittal’s company had a cash reserve of about Rs 1,000 crore and the new unit needed investment of Rs 800 crore. The family decided to pump all the money from its reserves. “Today our cash reserve is again Rs 2,500 crore. We make a net profit of Rs 500-600 crore a year as volumes have grown and the export realisation is better. Given our size, we are the most profitable among the domestic tractor makers and probably among the top automobile makers in margins,” claims Mittal. The company enjoys a margin of 25 per cent.  

Sonalika does not offer any credit to dealers and all sales are done against a bank guarantee or letter of credit. “This is rare in the tractor business,” said Mittal. Large number of parts and components used in the tractor manufacturing are done in house. Only a handful of products like batteries and tyres are procured from outside. That results in better control over costs.

Investment firm Blackstone exited the company recently after earning handsome returns for its stake bought over a four-year period. The 18 per cent stake was sold at Rs 1,800 crore to another existing stakeholder, Yanmar, valuing the business at Rs 10,000 crore.

Japanese tractor maker Yanmar, a $7 billion firm, has been associated with Sonalika for ten years now. With the purchase of Blackstone’s stake, it now holds 30 per cent. “When you existing partner decides to invest more, it shows the confidence. They (Yanmar) admit our new plant is better than their plants,” said Mittal.