Sonalika seeks to topple M&M in tractors, triples tractor production capacity to 300,000 units.

Sonalika seeks to topple M&M in tractors, triples tractor production capacity to 300,000 units.

Posted On - 14 Jun 2017

Privately-held tractor maker Sonalika has scaled up its capacity to 3,00,000 units with the inauguration of a new 2,00,000 unit plant at its existing site in Punjab’s Hoshiarpur. That is more than the 263,000 units sold by the country’s largest player M&M (including exports) last year. Sonalika sold a record 81,531 tractors in FY17, up almost 20 per cent over the previous year. The company posted a strong EBIDTA margin of 25 per cent, while its profit before tax grew 22 per cent to Rs 943 crore, and revenue was up 17 per cent to Rs 4,268 crore. The PBT growth is supported by rising volumes, better margins and a healthy other income arising out of the Rs 2,500 crore cash reserves built during the past five years. Raman Mittal, executive director, claims the company has stopped looking at volumes. “We now look at market share and volume will be a by-product,” he says. With a market share of 12.3 per cent, the company ranked third last year after M&M and TAFE. The 300,000-unit annual capacity looks big in a market that has an annual demand of 600,000 units. The decision to set up the 200,000-unit 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. “We could have happily kept selling 50,000 units a year and there was no need to create more capacity. The industry size was 400,000-450,000 units and the business was cyclical like it is now. But we saw that there is more appetite for our brand and we must aspire for leadership,” said Mittal. The first unit was expanded to 100,000 units and a new plant was set up at the same site 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. That makes it a debt free company today. “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 three in terms of margins among the automobile makers,” claims Mittal and adds that the company enjoys a margin of 25 per cent. The company 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 in Sonalika. “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. Sonalika is now building a new tractor platform for Yanmar. “Their tractor costs Rs 35-40 lakh. We make value products and we can complement each other. With Yanmar, we look to become global leaders and use each other’s strengths in every market, including India and Japan,” added Mittal. The company has already started shipping tractors to Japan, one of the eighty export markets for the company. The total exports were 12,241 units last year.

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