About the company: The largest tractor manufacturer of Pakistan, Millat Tractors Limited (PSX: MTL) was founded in 1964. It has since become Pakistan's leading engineering concern in the automobile sector, involved in the manufacture of agricultural tractors, diesel engines, forklifts, and a wide range of agricultural implements. The company has a market capitalisation north of Rs 37 billion, and was declared the second-best company of Pakistan by PSX in 2016.
With a 60 percent market share, Millat Tractors enjoys market leadership of tractors in Pakistan. The company has been listed in Forbe's list of Asia's Best 200 under a Billion Dollar companies.
Stock price & Pattern of shareholding MTL has underperformed the KSE100 index throughout the year. However, the stock skyrocketed from September onwards, tracking the expectations of upbeat first-quarter results and better performance of the company.
Around 40 percent of MTL stock is in the hands of the public, though there are no foreign investors. Moreover, the company does not have any significant outside investor, apart from three directors, State Life Insurance (4.62%) and a certain company called M/s Oversease Investment Company Ltd that owns about 8.3 percent of the stock. Google does not yield any credible information about the Oversease Investment Company Ltd. The associated companies are all part of Millat and account for a minute percentage of shareholding.
Prior Performance Although it deals in implements and other multi-application products, Millat Tractors earns around 95 percent of its revenues from tractors, so it reports its sales only under one segment. Thus, the erratic movement of Millat's top line can be attributed, to some extent, to the fluctuating sales tax on tractors.
In FY11, the government of Pakistan levied a GST of 17 percent on tractors, which caused a plummet in sales. The sales tax was brought down to five percent in the latter half of FY12, but again raised to 10 percent in January 2013, and in January 2014 was once again brought up to 16 percent. From FY15 to FY16, the sales tax on tractors has remained at 10 percent. As of FY17, the GST has been once again brought down to five percent.
The recent FY16 was one of the worst years in the industry's history. Depressed commodity prices along with the deteriorated crop production had hurt the farmers' purchasing powers. Moreover, the year saw botched tractor schemes from the Punjab and Sindh governments that were never implemented, further exacerbating matters. The company had to shut down production and lay off workers.
As per the FY16 Director's Report, Millat has recently begun focusing on exports. However, the numbers suggest that, if anything, the company's exports have been on a downtrend, not just in absolute terms but also as a percentage of total revenues. Nevertheless, the company reports that it entered into an agreement with AGCO Corporation for trademark licensing and exports of whole goods and parts. Moreover, the appointment of Millat as a distributor in Afghanistan was also finalised in FY16. The impact of these developments, then, would be in the current fiscal year.
Recent Performance For the first quarter of FY17, Millat Tractor' sales were up by 32 percent year-on-year, while costs controls saw gross margins expand by over 500 bps. The bottom-line was double what it was in the same period last year.
As mentioned earlier, at the start of the fiscal year, the sales tax on tractors was reduced from 10 percent to 5 percent. This has been the main reason behind the increased demand for tractors, and hence significantly higher sales from the company. Moreover, as per the Director's Report, various incentives given by the government contributed in improving farming economics. This includes the subsidy on fertilisers, pesticides, and energy, and reduced mark-up rates on agricultural loans.
Moreover, mega construction projects under CPEC have also contributed towards increased demand. Finally, as mentioned earlier, the company has started exports to Africa and Middle East as part of the agreement with AGCO. As per the Director's Report, Millat's products are being very well received due to their competitive price and quality.
Outlook A booming agriculture sector means a booming tractor industry. For now, although Pakistan is not out of the woods yet, the agriculture economy seems to doing better over the prior year, so FY17 looks like it might bring positive results for the company. While maintaining its market share in Pakistan, Millat is enhancing its exports as well. Moreover, CPEC-related demand is also driving the growth. Thus, going forward, Millat seems all set to flourish.
============================================================
MILLAT TRACTORS LIMITED
============================================================
Rs (Million) 1QFY17 1QFY16 YoY
============================================================
Net Sales 4,660 3,541 32%
Cost of Sales 3,661 2,960 24%
Gross Profit 1,000 581 72%
GP Margin 21% 16% up 510
bps
Distribution & Marketing Expenses 121 72 68%
Administrative Expenses 122 127 -4%
Operating Profit 757 381 99%
Other Income 30 18 67%
Other Operating Expenses 56 28 100%
Finance Cost 0 2 -100%
Taxation 218 117 86%
Net Profit 513 252 104%
NP Margin 11% 7% up 390
bps
EPS 11.58 5.69 104%
------------------------------------------------------------
Source: company notice to PSX.
============================================================
===================================================================
PATTERN OF SHAREHOLDING
===================================================================
Shareholders Category Percentage of holding
===================================================================
Directors, CEO, their spouses and minor children 29.79%
Associated Companies, Undertakings & Related Parties 2.05%
MTL Employees Welfare Trust 0.09%
MTL Provident Fund Trust 1.14%
MTL Gratuity Fund Trust 0.82%
Executives/Workers 1.03%
Public Sector Companies & Corporations 4.62%
State Life Insurance Corporation of Pakistan 4.62%
Banks, DFIs, Non-banking Financial Institutions 0.79%
Insurance Companies 5.30%
Modarabas 0.01%
Mutual Funds 1.24%
General Public (Local) 40.42%
Others 6.19%
-------------------------------------------------------------------
Source: Company accounts.
===================================================================