Millat and Al-Ghazi: waning margins

Millat tractors (PSX: MTL) and Al-Ghazi (PSX: AGTL) announced their financial results ending March 2018 with Al-Ghazi showing a marked improvement during the first quarter of CY18—growing by 40 percent in revenues—while Millat’s performance in the third quarter of FY18 remained subdued (5%). In 9MFY18, however, the latter’s revenues grew by 34 percent with a 38 percent growth to its bottom-line. Margins for both companies dropped during the Jan-Mar period owing to higher costs of production.

Though Millat leads the two in terms of market share and is volumetrically ahead, Al-Ghazi’s sales flourished during the quarter growing by 37 percent while Millat tractor sales dropped by 1 percent during the period. However, overall in 9MFY18, Millat’s tractor sales grew by 29 percent. Stronger sales against last year as well as 2016 for the tractor industry are a result of reduced sales tax of 5 percent (down from 10%), government supportive policies for the agriculture sector and higher crop yields (cotton, sugarcane, rice etc.).

The new Holland for Al-Ghazi also seems to be doing well. Al-Ghazi tractors are marginally cheaper than Millat tractors though Al-ghazi’s sales are concentrated toward lower end tractors which carry lower price tags. The company is also highly localized that meant its margins stood at 30 percent this quarter last year while Millat with considerably higher import content had its margins at 24 percent.

Both companies’ import costs grew as a result of exchange rate changes as well as higher commodity prices (steel and other metals etc.) that led to a drop in margins. This has been a common occurrence amongst most companies importing inputs.

Both companies also kept a firm hand on their indirect expenses during the period. Administrative and distribution costs remained the same during the Jan-Mar against last year—5 percent of revenues for Millat and 4 percent for Al-Ghazi.

There are chances that the budget announcement would do away with the current sales tax of 5 percent. If that happens, sales for both players will expand further as farmers’ purchasing power is usually limited and sensitive to prices. Better financing options together with any provincial tractor scheme kicking off with further boost sales going forward and bad the respective bottom-lines. Millat’s equity investment in the Hyundai-Nishat car and commercial vehicle venture will also bode well for Millat in the long run.