Broker says buy Punjab Tractors, target of Rs 240

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Broker says buy Punjab Tractors, target of Rs 240

Broking house, ASK-Raymond James is bullish on Punjab Tractors, PTL. It has maintained a 'buy rating' on the company with a target price of Rs 240.

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Broking house, ASK-Raymond James is bullish on Punjab Tractors , PTL. It has maintained a 'buy rating' on the company with a target price of Rs 240.

About the company's second quarter results review, the report says,

Better product mix and exports drive the topline growth

"During 2Q FY06, PTL reported sales growth of 12% YoY at Rs 2.1 billion, driven by better product mix and exports (a total of 340 tractors were exported during 1H, against a negligible number last year). The realizations improved by 8% YoY on account of its ability to pass on the price hike with the implementation of new tractor emission norms."

Operating margins soar

"The operating margins improved significantly by a huge 270 basis points, bps YoY and 145 bps on a sequential basis on account of significant easing of input price pressure. The good operational performance was complemented by high other income (dividend income from Swaraj Mazda and Swaraj Engine) leading to an increase in PAT by 56% YoY to Rs 168 million (against our expectation of Rs 112 million)."

Offers a high dividend yield of 5%

"On account of substantial extraordinary income (Rs 613 million less tax on the income being Rs 44 million), which the company generated resulting from 15% stake sale in Swaraj Mazda to Sumitomo, PTL has declared a special interim dividend of Rs 4.5 per share in this quarter. Even if we presume that the company maintains Rs 5.5 dividend per share, which it declared in the last fiscal of FY05, it would take the total for FY06E to Rs 10 per share. This translates into an attractive dividend yield of 5%."

Focus on export of tractors and components to continue

"The company is increasingly focusing on exports of auto components, mainly machined components to tier one suppliers of Ford (US). For FY06, we understand that the company has set an export target of Rs 350-360 million for auto components, taking the overall export target to around Rs 550 million, higher than the earlier indication of Rs 500 million."

Domestic volume outlook remains positive for 2H FY06

"Despite a modest volume growth registered by PTL in 2Q FY06 (4% YoY), the outlook remains positive for 2H FY06 on the back of good monsoons. Incrementally higher demand growth is expected from the states like Maharashtra, Tamil Nadu and Andhra Pradesh on account of good sugar and oilseed harvest. We expect the company to end the FY06 fiscal with a sales growth of 11% YoY to around 33,663 units (3% lower than our earlier estimates). On the back of better realizations and improvement in operational performance, we maintain our earlier earning estimates of Rs 15.3 for FY06E and Rs 19.5 for FY07E."

About the company's valuations, the report says, "The stock price during the last three months has under performed the Sensex by 2% on account of its sluggish volumes and an expected subdued quarterly performance. However, the worst seems to be over for the company as visible from its ability to register good operational performance despite reporting modest volume growth. In 2H FY06, on the back of good monsoons, there would be a significant pick up in volumes in the forthcoming months."

"At a PE of 10.2x for FY07E earnings, we believe that the valuations are attractive, offering limited downside potential on account of higher dividend yield of 5%. We maintain our Buy rating on the stock with a target price of Rs 240."