Al-Ghazi Tractors Limited

Al-Ghazi Tractors Limited (PSX: AGTL) was incorporated in Pakistan as a public limited company in June, 1983. AGTL is a subsidiary of Al-Futtaim Group of Dubai. The company is engaged in the business of providing agricultural solutions by manufacturing and selling tractors, generators, implements and spare parts. Its operational hub is located in Dera Ghazi Khan which has technical collaboration with Case New Holland (CNH), the largest manufacturer of agricultural tractors in the world. AGTL’s plant has the capacity of producing 30,000 tractors per annum in a single shift. AGTL also has a generator assembly line which can produce 2000 generators per annum in a single shift.

Pattern of Shareholding

As of December 31, 2022, AGTL has a total of 57.96 million shares outstanding which are held by 2613 shareholders. Associated companies, undertakings and related parties which include Al-Futtaim Industries Company (LLC) and CNHi Industrial N.V. are the major shareholders of AGTL and collectively hold 93.19 percent of its shares. This is followed by local general public having 4.89 percent stake in the company. The remaining shares are held by other categories of shareholders, each accounting for less than 1 percent of the outstanding shares of AGTL.

Historical Performance (2018-2022)

The topline of the company tells a mixed tale of ups and downs whereby it fell in 2019 and 2020 and took off thereafter. AGTL’s margins which shrank to a great extent in 2019 recovered significantly in 2020. In 2021, while GP margin slightly inched down, OP margin and NP margin grew considerably. In 2022, the margins slumped. The detailed performance review of each of the years under consideration is given below.

In 2019, AGTL sold 15,719 tractors which were 34 percent less than what it sold in 2018 resulting in 28 percent year-on-year drop in the sales revenue. The low sales volume was attributable to persistent economic slowdown coupled with worsening water crisis which affected farmers’ economic health. Moreover depreciation of Pak Rupee increased the overall cost of production of AGTL resulting in higher pricing rendering their products unaffordable for the farmer community in the absence of any significant support scheme by the government. Low off-take coupled with high cost of production took its toll on the margins of the company whereby the GP margin dropped to 18.19 percent as against 24 percent in 2018. Operating expenses remained in check due to lower plant operations, but OP margin couldn’t hold its ground and dipped to 12.5 percent in 2019 vis-à-vis around 20 percent in the previous year. Finance cost gave another major blow to the bottomline owing to high interest rate and increased bank borrowings. AGTL increased the utilization of overdraft facilities during the year to sustain operational activities amidst low sales and depressed liquidity. The bottomline nosedived by a massive 60 percent year-on-year in 2019 to clock in at Rs.977.65 million with NP margin of 6.99 percent versus 12.66 percent in 2018. EPS also dived to Rs.16.87 from Rs.42.31 in 2018.

While the company was still grieving over its performance in 2019, the global pandemic hit in 2020, further crippling the economy.The topline further shrank by 15 percent year-on-year as AGTL could only sell 12,142 tractors during the year which was 22.7 percent lesser than 2019’s sales volume. This was on account of economic downturn amidst COVID-19 coupled with increased pricing and low purchasing power of the farmer community. GP margin of the company, however, recovered from the trough it saw in 2019 to clock in at 23 percent. Low production and sales volume helped the company achieve cost cuttings on the operational front. This improved the OP margin to 17.37 percent. The company overcame the liquidity crunch it experienced in the previous year through efficient equity management. This coupled with low discount rate significantly reduced the finance cost for the company and helped the bottomline grow by a huge 38 percent year-on-year in 2020 to clock in at Rs.1349.66 million with an NP margin of 11.3 percent and an EPS of Rs.23.28.

2021 proved to be a lucky-charm for AGTL where its sales volume grew by a whopping 49.5 percent year-on-year to clock in at 18,156 units, resulting in sales revenue 72 percent higher than the last year. There are multiple factors behind this jaw-dropping growth in topline. Firstly, the economy was showing the signs of recovery post pandemic resulting in high economic growth. Secondly, the farmers had enough liquidity available due to government support initiatives. Moreover, satisfactory water availability also resulted in encouraging performance of the agriculture sector which created a ripple effect for the related industries such as tractors, fertilizers etc. High sales volumes and better pricing couldn’t fully offset the high cost of production and GP margin for the year dipped slightly. On the operational front, the company was able to contain its distribution cost despite high sales. This might be because of low export sales which kept the freight charges in check. Another positive development during the year was 148 percent year-on-year rise in other income which came on the back of return on deposit and other accounts and scrap sales. OP margin of AGTL significantly improved during 2021 to stand at 20.3 percent. Finance cost also dropped by 94 percent year-on-year in 2021 owing to low discount rate. However, the company believes that the financial cost would have dropped further, had the authorities released the sales tax refund amounting to Rs. 2.99 billion which is creating liquidity crunch for the company and compelling it to knock the doors of the banking sector. The NP margin clocked in at 14.37 percent in 2021 with a bottomline growth of 119 percent. Net profit stood at Rs.2957.86 million in 2021 with an EPS of Rs.51.03, the highest among all the years under consideration.

In 2022, AGTL sold 19,929 tractors which were 9.8 percent higher than the off-take registered in 2022. This culminated into a topline growth of 37 percent in 2022. AGTL greater engagement with suppliers and customers to bring about quality improvements resulted in remarkable sales performance when the overall market shrank by 22 percent during the year due to decline in the purchasing power of consumers due to inflation, high discount rate and disastrous flood that hit the country in the 2HCY22. While gross profit ticked up by 5 percent in 2022, GP margin substantially fell to 17.6 percent. Distribution expense posted a huge 168 percent rise on account of higher payroll expense, advertising and promotion budget, increased warranty expense and higher provision booked against doubtful receivables. Administrative expense also jumped up by 52 percent in 2022 on account of higher payroll expense, donations, depreciation as well as fee and subscription charges which includes directors’ remuneration. Higher provisioning against WPPF as well as slow moving and obsolete inventories pushed the other expense up by 61 percent in 2022. However, this was partially offset by a 26 percent growth in other income on account of higher scrap sales and return on deposit accounts. Higher operational expenses pushed the operating profit down by 6 percent in 2022 with OP margin sliding down to 13.98 percent. Finance cost multiplied by 15.66 times in 2022 which was on account of high discount rate coupled with a short-term financing of Rs.3709.37 million obtained in 2022. This drove AGTL’s debt-to-equity ratio 118 percent from 0 percent in the previous year. It is pertinent to note that AGTL had a debt-to-equity ratio of 290 percent and 402 percent in 2018 and 2019 respectively but it was able to trim it down to 8 percent in 2020 and then 0 percent in 2021. High finance cost coupled with higher effective tax rate due to the imposition of 4 percent super tax on current year income and 10 percent super tax on previous year income and 29 percent corporate tax rate translated into a 27 percent dip in the net profit. Net profit stood at Rs.2156.04 million in 2022 with an EPS of Rs.37.2 and an NP margin of 7.65 percent.

Recent Performance (1HCY23)

During 1HCY23, AGTL’s topline slid by 26 percent year-on-year. Import restrictions and Pak Rupee depreciation caused supply chain challenges and steep cost hike during the period. Furthermore, slow recovery from the floods of 2022 and shrinking pocket sizes of the farmer community due to unprecedented level of inflation also resulted in tamed demand during the period. According to the data released by PAMA, total tractor sales during 1HCY23 stood at 19429 units which was 40 percent lesser than the off-take recorded during the same period last year.

Gross profit of AGTL tumbled by 44 percent during 1CY23 with GP margin marching down from 20.9 percent in 1HCY22 to 15.8 percent in 1HCY23. Lower sales volume resulted in 25 percent thinner distribution expense during the period while administrative expense grew by a massive 86 percent on account of inflation as well as IT infrastructure investments which includes SAP implementation and transformation related expenditure incurred during the period. Other operating expenses were cut down by 35 percent year-on-year in 1HCY23 maybe on account of lower provisioning against WWF, WPPF as well as trade receivables. Other income posted a staggering 441 percent rise in 1HCY23 which might be due to higher returns on deposits on account of high discount rate. Operating profit shrank by 46 percent in 1HCY23 with OP margin ticking down to 12.8 percent from 17.56 percent during the same period last year. Finance cost multiplied by over 11 times (1123 percent) in 1HCY23. Net profit crashed by 58 percent year-on-year in 1HCY23 to clock in at Rs.802.326 million with NP margin tapering down to 5.44 percent from 9.7 percent during the same period last year. EPS also nosedived from Rs.33.31 in 1HCY22 to Rs.13.84 in 1HCY23.

Future Outlook

While the economic and political turbulence show no respite, all the sectors of the economy are at risk including the automobile sector. While the bumper cotton crop expected this year due to favorable weather conditions and increased plantation might offset the negative effect of last year’s flood, sluggish economy and high inflation may still limit the tractor sales. Yet there is a silver lining that increased localization and upward price revision may help the industry’s margins.