Tractors: AL-GHAZI TRACTORS LIMITED - Analysis of Financial Statements Financial Year 2004 - 3Q Financial Year 2010
The agricultural sector of Pakistan has suffered major jolts on account of country's near default situation, severe energy shortages, political and economic uncertainty and shrinking agriculture credit.
All these factors have collectively impacted the performance of the automobile sector, particularly the tractors. The agriculture-credit assigned to the sector is much less than what is required to meet the adequate demand as the current credit requirement is Rs 553 billion whereas the current credit disbursement is Rs 250 billion, indicating a shortfall of Rs 250 billion worth of funds that need to be infused in the sector.
There is a huge demand for tractors by the farming fraternity with approximately 218,607 applications submitted under the Green Tractor Scheme. Out of these only a minute 10,000 were accepted. The existing credit structure as provided by the Zarai Taraqqiyati Bank Limited (ZTBL) and the various government sponsored schemes like the current Green Tractor Scheme and prospective Benazir Bhutto Scheme are unfortunately not enough to satisfy the demands of this crucial sector.
Furthermore, there is a need to introduce policies that will benefit the local manufacturers and not encourage imports in order to one, save foreign exchange and two, utilise the spare domestic capacity. However, in light of the recent floods, it is expected that agricultural practices, after sustaining short-term setbacks, will in the long-term require modern mechanisms to make use of the fertilised soils and thus, use of tractors is likely to increase immensely.
COMPANY OVERVIEW
Al-Ghazi Tractors Limited (AGTL) engages in the manufacture and sale of agricultural tractors, implements, and spare parts in Pakistan. It manufactures tractors of various models, including 480-S (55 horse power), GHAZI (65 horse power), 640 (75 horse power), and 640 Special (85 horse power). The company was founded in 1983 and has headquarters in Karachi, Pakistan. Al-Ghazi Tractors Limited is a subsidiary of Al-Futtaim Industries Company LLC, having a lion's share of 50.02% followed by 43.17% by CNH Global NV, with whom AGTL has entered into a collaboration agreement for manufacturing new Holland brand of tractors. This agreement is expected to last till April 2016.
The company has completed its capacity expansion in FY06 as a result enhancing the capacity by 100%. Now, with an annual assembling capacity of 30,000 units and capacity utilisation of more than 100%, Al-Ghazi Tractors Limited (AGTL) is the country's largest tractor manufacturer.
RECENT RESULTS (3Q10)
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AL-GHAZI TRACTORS LIMITED-KEY FINANCIAL DATA
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Income Statement (Rs '000) 3Q'10 3Q'09 % Change
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Sales 10,989,789 11,351,478 -3
Cost of goods sold -8,863,319 -9,536,972 -7
Distribution cost -65,421 -63,924 2
Administrative expenses -91,076 -73,927 23
Operating Profit (EBIT) 2,048,431 1,879,037 9
Financial Charges -1,239 -1,981 -37
Net Income Before Taxes 2,047,192 1,877,056 9
Net Income After Taxes 1,344,133 1,229,356 9
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Balance Sheet (Rs '000) 3Q'10 FY'09 % Change
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Stores & Spares 4,398 11,691 -62
Stock in Trade 1,453,355 1,253,682 16
Cash & Bank Balances 2,451,539 3,522,479 -30
Total Current Assets 6,957,073 7,124,751 -2
Property, Plant & Equipment 358,579 252,695 42
Total Assets 7,316,580 7,380,671 -1
Total Current Liabilities 1,463,635 1,907,421 -23
Total Liabilities 1,518,597 1,960,752 -23
Paid Up Capital 214,682 214,682 0
Total Equity 5,797,983 5,419,919 7
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Owing to the ravaging floods and the ensuing havoc caused in the agricultural sector, the company witnessed a slowdown in sales of its tractors in the third quarter of 2010 while the plant at DG Khan had to remain closed for nearly a month due to inundated roads.
Still, the company managed to show remarkable results in 3Q10 with profit before tax and profit after tax both increased by 9% YoY. PBT stands at Rs 2.047 billion, having risen from Rs 1.877 billion while PAT stands at Rs 1.344 billion having risen from Rs 1.229 billion. This can be attributed largely to increased sales during the first half of the current year and a higher operating profit. EPS stands at Rs 31.31.
During 3Q10, production reached 21,917 tractors, while sales of 21,916 tractors were recorded, comparably lower than the 23,770 sold in the corresponding period last year. However, it must be noted that the plant is being utilized at near full capacity of 30,000 tractors per year and increases in demand will require further investment in capacity expansion. Another point not to be missed is that while AGTL's sales were on the decline, Millat Tractors Limited was witnessing rising sales in the third quarter of 2010, thereby increasing its market share. Sales revenue amounted to Rs 10.989 billion, a decline of 3% YoY. CGS amounted to Rs 8.863 billion, a decline of 7% YoY. This decline was caused by loss of value of finished goods.
Distribution costs and Administration expenses are on the rise owing to inflationary pressures, higher utilities charges and an increase in salaries paid. They increased 2% and 23% respectively YoY, bringing EBIT to stand at Rs 2.048 billion, 9% higher than Rs 1.879 billion in the corresponding period last year.
On the assets side, there was an increase in tied-up working capital owing to a 16% increase in Stock in Trade from Rs 1.253 billion to Rs 1.453 billion since the end of FY09. On the other hand, stores and spares decreased 62% from Rs 11 million to Rs 4 million. The stock in trade increased because of falling liquidity of buyers while stores and spares fell after the close down of the DG Khan plant for a month.
As a result of lower liquidity, Cash and Bank Balances also declined by 30% since the end of FY09, thus bringing down total current assets by 2% to Rs 6.957 billion. However, total assets have barely changed in amount due to a 42% increase in fixed assets.
Liabilities (both current and total) have witnessed a 23% decline while equity is steadily on the rise with increase in accumulating reserves.
FINANCIAL PERFORMANCE (FY09)
Production and sales: Al-Ghazi outdid all previous performance levels by surpassing full capacity to produce 30,351 tractors in FY09. This was recorded at 10.16% YoY growth rate, despite a slowdown in demand owing to credit crunch faced by the agricultural sector in light of rising defaults on bank loans.
As can be seen from the graph below, trend of Sales (units) has consistently gone upward. However, in recent years, the percentage increase in sales (units) has considerably reduced owing to stiff competition with Millat Tractors, which registered a 12.5% YoY growth in sales (units) to reach a record high of 30,677 tractors in 2009, the highest number in Pakistan.
PROFITABILITY
FY09 proved fruitful for Al-Ghazi in terms of profitability. Gross profit and net profit both increased, with gross profit rising to Rs 2.645 billion, 68% YoY increase from Rs 1.577 billion and net profit rising to Rs 1.743 billion, 57% YoY increase from Rs 1.113 billion. Rising profitability can be attributed to the Green Tractor Scheme Punjab as well as better support prices for wheat and rice, which resulted in a rise in sales of tractors. Millat Tractors, despite higher sales, recorded a lower Net Profit at Rs 1.215 billion, 50% higher than in FY08.
Therefore, the Gross Profit Margin rose from 15.61% in FY08 to 16.78% in FY09. Similarly, the Net Profit Margin increased slightly from 11.01% in FY08 to 11.06% in FY09. Likewise, the Return on Assets (ROA) and Return on Equity (ROE) both experienced an increase with ROA rising from 15.71% in FY08 to 23.62% in FY09 and ROE coming up from 25.14% in FY08 to 32.17% in FY09. ROA rose on the back of a 57% increase in the Net Profit against a 4% rise in the Company's Assets, whereas, the ROE rose due to higher increase in Net Profit than in Equity (22% increase YoY).
ASSET MANAGEMENT
An assessment of the Asset Management shows improvement over FY08. Inventory Turnover fell more than 50% from 69 days in FY08 to 29 days in FY09 reflecting a shorter time to sell and replenish inventory. This reflects a return to old practices, which had been disrupted in FY08 over qualms with the government regarding subsidies. The Day Sales Outstanding rose from 0.25 in FY08 to 0.46 in FY09, as the trade debts rose almost 200% in FY09 to Rs 20 million. Consequently, the operating cycle fell from 69.6 days in FY08 to 29.4 days in FY09. On the other hand, Millat Tractors Inventory Turnover stayed high at 52 days in FY09.
Total Asset Turnover rose from 1.43 in FY08 to 2.14 in FY09. This reflects poorly compared to Millat Tractors' Total Asset Turnover of 2.35. The Sales to Equity Ratio rose from 2.28 in FY08 to 2.91 in FY09. The increase in this indicator is attributed to the higher sales of the tractors.
LIQUIDITY
Al-Ghazi Tractors was slightly trapped with the liquidity in FY08 owing to a few major factors. Firstly, the government's sudden and unexpected reversal of subsidy policy under the Green Tractor Scheme leading to a decline in sales of 2,594 tractors and secondly, ZTBL's failure to encash bank drafts of Rs 298.4 million, which later climbed to Rs 471.4 million, exacerbated the liquidity position. Adding to the problem was Federal Board of Revenue (FBR's) inefficiency and delays in refunding the sales tax paid by the company. However, the situation improved massively in FY09 and thus, Current Ratio climbed to 3.74. Compared to Millat Tractors, however, Liquidity is much more favourable. Millat's Current Ratio was 1.7 for FY09.
DEBT MANAGEMENT
An evaluation of the Debt Management capabilities of Al-Ghazi Tractors shows improvement since FY08. Long-term debt to equity ratio fell slightly from 1.05% in FY08 to 0.98% in FY09 due to a higher rise in equity than in non-current liabilities. Equity rose 22% in FY09 while long-term debt rose only 14%. Consequently, debt to equity ratio also fell from 0.6 in FY08 to 0.36 in FY09, since total debt fell by 26% and total equity rose by approximately 22%.
The Debt-to-Asset ratio declined from 37.51% in FY08 to 26.57% in FY09, showing faster increase in Total Assets relative to Total Debt. This could indicate that the company's assets are less dependent on borrowed funds despite a record high level of production in FY09. The Times Interest Earned (TIE) ratio rose dramatically from 617 in FY08 to 1,235 in FY09, indicating lower bank charges paid out as well as higher returns on investments. This is evidenced by lower Financial Charges of Rs 2.154 million in FY09 and higher earnings on Certificates of Investment and Deposits with banks.
Millat Tractors presents an interesting case with long-term debt to equity ratio of twice as much as that of Al-Ghazi at 2%. Meanwhile, TIE stands at 46.28 times, showing a highly leveraged position of the company as compared to Al-Ghazi, with lower interest earnings and higher reliance on borrowings for funding Assets.
MARKET VALUE
Rising net profits led to an increase in earnings per share from Rs 25.93 in FY08 to Rs 40.61 in FY09. Dividend per share amounted to Rs 15 in FY09, higher than Rs 12.5 in FY08. Price to earnings ratio declined from 10 times to 4.3 times owing to slower market response to higher profitability. However, rising prices in 2010 balanced out this effect. Meanwhile, Book Value rose on the backdrop of constant shareholding, from Rs 206 in FY08 to Rs 252 in FY09.
Millat Tractors' EPS stood at Rs 51.87 while Dividend per Share stood at Rs 45, both much higher than Al-Ghazi's. Also, Millat's market value was slightly higher than Al-Ghazi's with share price averaging Rs 211.27 in FY09.
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AL-GHAZI TRACTORS LIMITED-KEY FINANCIAL DATA
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Income Statement (Rs'000) FY'04 FY'05 FY'06 FY '07 FY'08 FY'09
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Sales 6,735,195 7,739,322 9,022,515 9,081,310 10,107,874 15,764,825
Cost of goods sold -5,136,710 -6,136,774 -7,387,468 -7,427,824 -8,530,087 -13,119,011
Distribution cost -53,328 -61,403 -65,152 -67,145 -75,286 -87,569
Administrative expenses -68,427 -79,744 -80,043 -85,845 -91,560 -111,270
Operating Profit (EBIT) 1,490,434 1,643,073 1,912,941 1,917,466 1,685,675 2,660,988
Financial Charges -6,245 -7,517 -2,761 -3,012 -2,734 -2,154
Net Income Before Taxes 1,484,189 1,635,556 1,910,180 1,914,454 1,682,941 2,658,834
Net Income After Taxes 964,785 1,060,873 1,229,318 1,267,410 1,113,256 1,743,535
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Balance Sheet (Rs '000) FY'04 FY'05 FY'06 FY '07 FY '08 FY '09
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Stores & Spares 8,847 15,316 8,118 10,442 14,673 11,691
Stock in Trade 647,986 740,140 731,002 708,733 1,931,399 1,253,682
Cash & Bank Balances 2,050,184 5,017,307 5,142,121 4,384,551 3,348,997 3,522,479
Total Current Assets 4,059,887 7,056,152 7,025,286 6,581,042 6,840,054 7,124,751
Property, Plant & Equipment 84,911 158,513 252,243 244,928 235,452 252,695
Total Assets 4,180,152 7,245,461 7,278,389 6,827,308 7,086,010 7,380,671
Total Current Liabilities 1,545,098 4,155,274 3,698,853 2,938,224 2,611,710 1,907,421
Total Liabilities 1,564,064 4,173,512 3,728,509 2,976,087 2,658,238 1,960,752
Paid Up Capital 195,165 214,682 214,682 214,682 214,682 214,682
Total Equity 2,616,088 3,071,949 3,549,880 3,851,221 4,427,772 5,419,919
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LIQUIDITY RATIO FY'04 FY'05 FY'06 FY '07 FY '08 FY '09
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Current Ratio 2.63 1.70 1.90 2.24 2.62 3.74
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ASSET MANAGEMENT FY'04 FY'05 FY'06 FY '07 FY '08 FY '09
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Inventory Turnover(Days) 35.11 30.14 34.38 28.51 69.31 28.90
Day Sales Outstanding (Days) 0.41 0.28 0.28 0.96 0.25 0.46
Operating Cycle (Days) 35.51 30.42 34.67 29.47 69.57 29.36
Total Asset turnover 1.61 1.25 1.06 1.33 1.43 2.14
Sales/Equity 2.57 2.94 2.18 2.36 2.28 2.91
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DEBT MANAGEMENT FY'04 FY'05 FY'06 FY '07 FY '08 FY '09
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Debt to Asset (%) 37.42 57.60 51.23 43.59 37.51 26.57
Debt/Equity (Times) 0.60 1.36 1.05 0.77 0.60 0.36
Times Interest Earned (Times) 238.66 692.84 218.58 636.61 616.56 1235.37
Long Term Debt to Equity (%) 0.72 0.59 0.84 0.98 1.05 0.98
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PROFITABILITY (%) FY'04 FY'05 FY'06 FY '07 FY '08 FY '09
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Gross Profit Margin 23.73 18.12 20.71 18.21 15.61 16.78
Net Profit Margin 14.32 13.63 13.71 13.96 11.01 11.06
Return on Asset 23.08 16.97 14.58 18.56 15.71 23.62
Return on Common Equity 36.88 40.02 29.88 32.91 25.14 32.17
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PER SHARE FY'04 FY'05 FY'06 FY '07 FY '08 FY '09
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Earning per share 22.47 24.71 28.63 29.52 25.93 40.61
Price earning ratio 6.94 7.97 7.50 8.52 10.03 4.30
Dividend per share 15.00 17.50 17.50 17.50 12.50 15.00
Book value 134.04 143.09 165.36 179.39 206.25 252.46
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COURTESY: Economics and Finance Department, Institute of Business Administration, Karachi, prepared this analytical report for Business Recorder.
DISCLAIMER: No reliance should be placed on the [above information] by any one for making any financial, investment and business decision. The [above information] is general in nature and has not been prepared for any specific decision making process. [The newspaper] has not independently verified all of the [above information] and has relied on sources that have been deemed reliable in the past. Accordingly, the newspaper or any its staff or sources of information do not bear any liability or responsibility of any consequences for decisions or actions based on the [above information].
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