Al-Ghazi Tractors Limited started its operations in 1983. Listed on the KSE, its market capitalization is nearly Rs 24 billion, making it one of the largest auto stocks in the country. The firm's holding company is the Al-Futtaim Group in Dubai, which owns over 50 percent of the company, while 43 percent is in the hands of Case New Holland - a world leader in agricultural and construction equipment.
Al-Ghazi has been winning several awards such as "Corporate Excellence" and "Best Corporate Performance" over the past several years. It was also the first automobile company in Pakistan to earn the ISO-9000 certification. The firm claims to produce the "cheapest quality tractors in the whole world," emphasizing its cost-reduction measures and its mission of keeping its products affordable to the farmer community. It has 82 dealers spread across the country and over 3,000 mechanical workshops as customer care centers.
Al-Ghazi's product portfolio spans a variety of tractors, generators, and agricultural implements such as cultivators, ploughs, diggers, fork lifts, and others. However, tractors are its bread and butter.
PRIOR PERFORMANCE Central to the tractor industry has been the government's on-and-off tax hikes and cuts; in 2011, the government of Pakistan levied a GST of 17 percent on tractor sales. This was brought down to 5 percent in the following year. Later, in 2013, the sales tax on tractors was again raised to 10 percent and in 2014 was once again brought up to 17 percent. Now, as of FY15, the sales tax on tractors has been brought down once again to 10 percent. As can be seen from the graph, Al-Ghazi Tractors' sales moved inversely with these changes in the sales tax.
Other than that, the overall agricultural sector saw a time of malaise over this time for a number of reasons, the least of which were rising input costs as against curtailment of loaning by the banks, little subsidies, and higher fertilizer and power tariffs.
Nevertheless, Al-Ghazi managed to post a profit each time. In fact, a comparison with the tractor market leader -Millat Tractors Limited - reveals that Al-Ghazi's gross margins have grown significantly and consistently higher than Millat; as can be seen in the graph, Millat's gross margins dropped from 19 percent in FY10 to 18 percent in FY14. Meanwhile, Al-Ghazi's gross margins went from 20 percent in CY10 to an impressive 26 percent in FY14. Indeed, Al-Ghazi's "lean management" and cost-controlling measures have helped its profitability immensely and quite visibly.
Recent Performance Al-Ghazi took off to a terrific start for 2015; the company's top line growth for the first quarter was an astounding 175 percent, with a phenomenal 162 percent growth in bottom line profit year-on-year.
As shown earlier, the firm's improved sales figures may be attributed to the cut in GST on tractor sales from 17 percent to 10 percent last year. This would have improved farmers' purchasing power. Moreover, the low fuel prices would have made tractors and relevant equipment more attractive.
The general state of the economy has been good this fiscal year. Inflation has been at record lows and depressed fuel prices have given everyone lower costs. Also, crop yields have been more favourable this season, with bumper crops of wheat and record levels of cotton production. All this creates a somewhat positive atmosphere for the agricultural sector.
Future Outlook The tractor industry seems to be doing alright for the time being. Fluctuations in the tax rate affect sales, and then there's the n number of factors such as agricultural produce, purchasing power, and land size.
There are reports that both Al-Ghazi and Millat have decided to increase the prices of their tractors just weeks before the budget for FY16. These local tractor manufacturers have not intimated their plans to the concerned ministries. According to sources, the government will also include the tractor industry in the new auto policy and will offer incentives to new investment so that farmers may get tractors at reasonable rates. Moreover, the SBP's rate cut might also play its role in facilitating farmers in obtaining the necessary finances for purchasing tractors.
AL-GHAZI TRACTORS LIMITED
Rs (Million) 1QCY15 1QCY14 YoY
Sales 3,443 1,251 175%
Cost of Sales 2,543 938 171%
Gross Profit 900 313 188%
GP Margin 26% 25% 100 bps
Distribution Cost 21 28 -25%
Administrative Expenses 56 48 17%
Other Income 144 103 40%
Other Operating Expenses 67 24 179%
Finance Cost 0 0 -
Profit Before Taxation 900 317 184%
Taxation 284 83 242%
Net Profit 616 235 162%
NP Margin 18% 19% 200 bps
EPS 10.63 4.05 162%
Source: company notice to KSE