Al-Ghazi: just about managing

The outgoing year has been tough for the automobile industry. Demand for tractors has radically come down as agriculture output of major crops and demand for mechanization dropped, also reflecting the slowdown in the rural economy. In its financials notice for the half year 2019 to the PSX, Al-Ghazi (PSX: AGTL) shows its bottom-line shrink to nearly half of what it was in this period last year.

While the overall tractor industry pie trimmed down, Al-Ghazi’s sales decline of 38 percent also came with a decline in its share in the pie—from 41 percent to 38 percent as per data from Pakistan Automotive Manufacturers Association (PAMA). The revenue decline of 32 percent reflects its price revision policy has worked well and kept revenue per unit sold in check.

Though the company boosts very high localization (upto 92 percent local contents), its cost pressures owing to rupee devaluation should have been limited. Costs of sales per unit sold rose by 15 percent in 1HCY19. The economy is in recovery and has been ridden by inflation. These inflationary pressures have likely caused raw material prices to go up. Margins slid consequently, but not as much as other companies in the automobile sector have given their greater reliance on imported content.

The company has been complaining that it is facing liquidity pressures as the government has not released its sales tax refunds to the tune of Rs2 billion. The company has been utilizing its overdraft facility to support business operations. Cost of borrowing is only higher. Finance costs as a result rose dramatically- in 1HCY19, they stand at 2 percent of revenues against 0.03 percent last year.

Its other expenditure included administrative and distribution costs also rose to 5 percent of revenues against 4 percent last year which put pressure on profits. Despite a lower effective tax of 29 percent (1HCY18: 33%), the company registered somber earnings of Rs961 million, which evidently could not be helped. The company’s demand is out of its hand, but it could increase efforts to reach more overseas markets. It also cannot raise prices too much, since tractors are highly sensitive to price fluctuations, and it would result in demand further dying down. Without the release of stuck funds, the company’s may incur further cash flow problems that don’t bode well at this time of dwindling demand.