Agricultural Tractors: AL-GHAZI TRACTORS LIMITED - Analysis of Financial Statements December 2004-September 2007
Al-Ghazi Tractors Limited (AGTL) engaged in the manufacture and sale of agricultural tractors, implements, and spare parts in Pakistan. It manufactures tractors of various models, including 480-S (55 horsepower), GHAZI (65 horsepower), 640 (75 horsepower), and 640 Special (85 horsepower). The company was founded in 1983 and its headquarter is in Karachi.
Al-Ghazi Tractors is a subsidiary of Al-Futtaim Industries Company LLC. The company has completed its capacity expansion in FY06 as a result enhancing the capacity by 100%. Now, with an annual assembling capacity of 30000 units and capacity utilization of more than 100%, Al-Ghazi Tractors Limited is the country's largest tractor manufacturer.
The government of Pakistan has fixed the prices of tractors for local tractor manufacturers since 1998, which is hampering the growth of the industry in terms of its sales. Whereas the cost of manufacturing increased on account of increase in interest rates, gas prices etc; the fixed selling price depressed the profit margins of the company and the importers liberally charged the price of their own choice, thus creating an uneven playing field.
However in the recent budget 2007-08, GoP deregulated the selling prices of tractors. Now tractors manufacturers can increase the prices of tractors in order to support their reduced margins because of higher steel prices. Thus any upward revision in prices will improve the profitability of the company.
RECENT RESULTS:
Amidst the shortage of raw materials and disruptive rains in July and August curtailing the pace of desired production and sales, the company continues to strive to deliver progressing results, 5738 tractors were sold in the third quarter, thus bringing the total sales for the three quarters of the year 2007 to 19,124 compared with 19,010 sold in the similar period last year. Pre-tax profit for the third quarter - (July-September 2007) - stood at Rs 414.27 million compared with Rs 486.10 million earned last year. Pre-tax profit for the three quarters - (January-September 2007) - now totals Rs 1.41 billion compared with Rs 1.40 billion earned in the three quarters of 2006.
Robust demand for the tractors owing to better performance of the economy, better crop yield and overall improvement in the buying power are all contributing towards better liquidity position of the company with high cash balance, advances and inventory level. Thus, the current ratio is improving rapidly. With a current ratio hovering around 2, AGTL fares reasonably better than its competitors.
Tractor orders from ZTBL are declining whereas cash advances from customers are increasing. This is because credit disbursement by the banks for agriculture has decreased by more than 50%, eroding away a major part of tractor business from AGTL.
Fixed selling price since 1998 is hurting the revenue of AGTL on account of high cost of manufacturing as indicated by irregular profit margin ratios of the company. High sales volume was the main driver, along with the efficiency on part of AGTL towards cost reduction that bolstered the profitability position of AGTL.
With one of the highest deletion levels in the industry (83%), exchange rate risk is the least for the company. However, fluctuations in international steel prices continue to affect the net profit of the company. ROE is, however, declining on account of high revenue reserves. Lately, it has been marginally lower than the industry average otherwise it fared well in the preceding years. ROA, too followed the same trend and declined modestly, but was above the overall industry.
Asset management ability of the company, though deteriorating in 3Q'07, is far better than that of the industry. This can be attributed to speedy delivery, better management and control over the business processes. As evident from the operating cycle, the company is proficient in terms of converting its inventory into cash.
On the other hand, TATO and sales/equity has posted a declining trend mainly attributable to new plant and equipment and high revenue reserves respectively. The company can fare much better in its asset utilization with increasingly better capacity utilization and further extensions.
Surprisingly AGTL does not have any long-term loans, thus its long-term debt-to-equity ratio is negligible. All expansions are either supported by short-term loans or equity thus keeping the debt ratios near to the ground. Consequently, finance expense for AGTL is on a lower side thus poses meager threat in the wake of increase in KIBOR. Thus, interest-paying capacity of AGTL (TIE Ratio) is fairly high, even compared to its competitors.
Rising cost of material has affected the marketability of AGTL as well owing to high steel and gas prices. DPS (till FY06) is also decreasing. In general, the market value ratios did not perform well when compared to the industry averages. The BV and P/E are however increasing signifying investors' confidence in AGTL.
FUTURE OUTLOOK:
Overall, the company has performed well since the past 3-4 years and has been able to capture a significant market share of around 53%. Recently two new models of tractors were launched signifying continuous growth and expansion on part of the company. The disbursement of loans in the agro sector by ZTBL has reduced significantly, thus leading to lower bookings in FY07.
The decision to de-regulate the prices in Budget 2007-08 will likely to bode well for the company's financials. The overall impact would reflect on the company's forthcoming accounts. The government had imposed 1% Special Excise Duty on sale of tractors effective 1st July 2007.
This was subsequently withdrawn; however an anomaly was created whereby local components being procured from local vendors continue to attract 1% Special Excise Duty. If this too is not withdrawn then it will create an additional burden on the company's production costs and will eventually be passed on to the customers.
Although the import of tractors is allowed duty-free, and the Tariff Based System affects the company's costs, the de-regulation of prices negates the impact of all the decisions taken earlier that impacted the industry adversely.
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AL-GHAZI TRACTORS LIMITED-KEY FINANCIAL DATA
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Income Statement (Rs'000) FY'04 FY'05 FY'06 Q3 '07
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Sales 6735195 9022515 7739322 6649553
Cost of goods sold -5136710 -7387468 -6136774 -5436243
Distribution cost -53328 -65152 -61403 -53291
Administrative expenses -68427 -80043 -79744 -63511
Operating Profit (EBIT) 1490434 1912941 1643073 1417272
Financial Charges -6245 -2761 -7517 -2788
Net Income Before Taxes 1484189 1910180 1635556 1414484
Net Income After Taxes 964785 1229318 1060873 945256
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Balance Sheet (Rs'000) FY'04 FY'05 FY'06 Q3 '07
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Stores & Spares 8,847 15,316 8,118 22,517
Stock in Trade 647,986 740,140 731,002 865,657
Cash & Bank Balances 2,050,184 5,017,307 5,142,121 4,486,632
Total Current Assets 1,381,715 3,289,778 3,935,305 3,595,985
Property, Plant
& Equipment 84,911 158,513 252,243 245,709
Total Assets 4,180,152 7,245,461 7,278,389 7,018,619
Total Current Liabilities 1,545,098 4,155,274 3,698,853 3,241,183
Total Liabilities 1,564,064 4,173,512 3,728,509 3,274,875
Paid Up Capital 195,165 214,682 214,682 214,682
Total Equity 2,616,088 3,071,949 3,549,880 3,743,744
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LIQUIDITY RATIO FY'04 FY'05 FY'06 Q3 '07
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Current Ratio 2.63 1.70 1.90 2.09
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ASSET MANAGEMENT FY'04 FY'05 FY'06 Q3 '07
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Inventory Turnover(Days) 35.11 30.14 34.38 36.06
Day Sales Outstanding (Days 0.41 0.28 0.28 3.94
Operating Cycle (Days) 35.51 30.42 34.67 40.01
Total Asset turnover 1.61 1.25 1.06 0.95
Sales/Equity 2.57 2.94 2.18 1.78
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DEBT MANAGEMENT FY'04 FY'05 FY'06 Q3 '07
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Debt to Asset(%) 37.42 57.60 51.23 46.66
Debt/Equity (Times) 0.60 1.36 1.05 0.87
Times Interest
Earned (Times) 238.66 692.84 218.58 508.35
Long Term Debt
to Equity(%) 0.72 0.59 0.84 0.90
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PROFITABILITY (%) FY'04 FY'05 FY'06 Q3 '07
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Gross Profit Margin 23.73 18.12 20.71 18.25
Net Profit Margin 14.32 13.63 13.71 14.22
Return on Asset 23.08 16.97 14.58 13.47
Return on
Common Equity 36.88 40.02 29.88 25.25
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PER SHARE FY'04 FY'05 FY'06 Q3 '07
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Earning per share 22.47 28.63 24.71 7.17
Price earning ratio 6.94 7.97 7.50 29.36
Dividend per share 30.00 27.27 27.27 0.00
Book value 134.04 143.09 165.36 174.39
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COURTESY: Economics and Finance Department, Institute of Business Administration, Karachi, prepared this analytical report for Business Recorder.
DISCLAIMER: No reliance should be placed on the [above information] by any one for making any financial, investment and business decision. The [above information] is general in nature and has not been prepared for any specific decision making process. [The newspaper] has not independently verified all of the [above information] and has relied on sources that have been deemed reliable in the past. Accordingly, the newspaper or any its staff or sources of information do not bear any liability or responsibility of any consequences for decisions or actions based on the [above information].
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