The country’s premier tractor manufacturing company, Millat Tractors Limited (PSX: MTL) released its 1QFY19 result yesterday, which saw limited growth in the company’s top-line and reduced profitability margins. MTL’s revenues registered an increase of 9 percent and the growth was on the back of a rise in tractor prices, whereas tractor volumes sold registered a negligible increase in 1QFY19 on a year-on-year basis.
As far as profitability margins are concerned, MTL has a very high localisation component in the range of 90-95 percent so it comes as no surprise that the rapid rupee depreciation in the past year has taken a toll on the company’s gross margins, which fell by 145 bps as compared to the same period last year. Raw material procurement has also become more expensive due to imposition of new taxes on imports.
The company’s other income also decreased by 21 percent in 1QFY19 on a yearly basis, which can be attributed to a fall in advances from customers. MTL also booked higher taxes as a tax rate of 32 percent was applied in 1QFY19 as compared to 29 percent in the same period last year.
Going forward, there is likely to be slowdown in growth for the company, which is also reflected in MTL’s Director’s report released alongside the result. As the agriculture sector’s performance is strongly correlated with MTL revenues, reduced cotton production in future quarters is likely to affect farmer cash flows and in turn reduce purchasing power especially for relatively expensive farm machinery such as tractors.
Industry analysts expect overall tractor sales to cross the 70,000 unit mark this year and as MTL has a 60 percent share, that will make its tractor sales somewhere around 43,000 units. However, if agricultural output fails to rise, this target might very well be missed.
Positive triggers for MTL include its equity contribution to Hyundai-Nishat auto-manufacturing venture and will help the company expand into other business areas in the sector. The company might also witness growth in tractor sales if the PTI government’s housing plans gain traction and construction activity experiences an up tick but that will materialise in the medium rather than short term.
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