Al-Ghazi Tractors Limited

Al-Ghazi Tractors Limited (PSX: AGTL) was incorporated in Pakistan as a public limited company in June 1983. AGTL is a subsidiary of the Al-Futtaim Group of Dubai. The company is engaged in the business of providing agricultural solutions by manufacturing and selling tractors, generators, implements, and spare parts. Its operational hub is located in Dera Ghazi Khan which has technical collaboration with Case New Holland (CNH), the largest manufacturer of agricultural tractors in the world. AGTL’s plant has the capacity of producing 30,000 tractors per annum in a single shift. AGTL also has a generator assembly line that can produce 2000 generators per annum in a single shift.

Pattern of Shareholding

As of December 31, 2021, AGTL has 57.96 million shares outstanding shares which are held by 2,507 shareholders. More than 72 percent of shares of the company are held by individuals followed by financial institutions owning 9.2 percent of AGTL’s shares. Insurance companies have a stake of 7.22 percent in the company. Joint stock companies account for around 1 percent of AGTL’s outstanding shares. The remaining shares are held by other categories of shareholders.

Historical Performance (2017-2021)

The top line of the company tells a mixed tale of ups and downs whereby it grew in 2018 and 2021, and the two years in between were sluggish and the topline plunged immensely. Talking about 2019 where AGTL sold 15,719 tractors which was 34 percent less than what it sold in 2018 resulting in a 28 percent year-on-year drop in the sales revenue. The low sales volume was attributable to a persistent economic slowdown coupled with a worsening water crisis which affected farmers’ economic health. Moreover, the depreciation of the Pak Rupee increased the overall cost of production of AGTL resulting in higher pricing rendering their products unaffordable for the farmer community in the absence of any significant support scheme by the government. Low off-take coupled with the high cost of production took its toll on the margins of the company whereby the GP margin clocked in at 18.19 percent as against 24 percent in 2018. Operating expenses remained in check due to lower plant operations, but OP margin couldn’t hold its ground and dipped to 12.5 percent in 2019 vis-à-vis around 20 percent in the previous year. Finance costs gave another major blow to the bottom line owing to high-interest rates and increased bank borrowings. AGTL increased the utilization of overdraft facilities during the year to sustain operational activities amidst low sales and depressed liquidity. The bottom line nosedived by a massive 60 percent year-on-year in 2019 with an NP margin of 6.99 percent.

While the company was still grieving over its performance in 2019, the global pandemic hit in 2020, further crippling the economy. The topline further shrank by 15 percent year-on-year as AGTL could only sell 12,142 tractors during the year which was 22.7 percent lesser than in 2019 owing to the economic downturn amidst Covid-19 coupled with increased pricing and low purchasing power of the farmer community. GP margin of the company, however, recovered from the trough it saw in 2019 to clock in at 23 percent. Low production and sales volume helped the company achieve cost cuttings on the operational front. This improved the OP margin to 17.37 percent.

The company overcame the liquidity crunch it experienced in the previous year through efficient equity management. This coupled with a low discount rate significantly reduced the finance cost for the company and helped the bottom line grow by a huge 38 percent year-on-year in 2020.

2021 proved to be a lucky charm for AGTL where its sales volume grew by a whopping 49.5 percent year-on-year resulting in sales revenue 72 percent higher than the last year. There are multiple factors behind this jaw-dropping growth in the top line. Firstly, the economy was showing signs of recovery post-pandemic resulting in high economic growth. Secondly, the farmers had enough liquidity available due to government support initiatives. Moreover, satisfactory water availability also resulted in encouraging performance of the agriculture sector which created a ripple effect for the related industries such as tractors, fertilizers, etc. High sales volumes and better pricing couldn’t fully offset the high cost of production and GP margin for the year dipped slightly. On the operational front, the company was able to contain its distribution cost despite high sales. This might be because of low export sales which kept the freight charges in check. Another positive development during the year was a 148 percent year-on-year rise in other income which came on the back of return on deposit and other accounts and scrap sales. OP margin of AGTL significantly improved during 2021 to stand at 20.3 percent. Finance costs also dropped by 94 percent year-on-year in 2021 owing to the low discount rate. However, the company believes that the financial cost would have dropped further, had the authorities released the sales tax refund amounting to Rs. 2.99 billion which is creating a liquidity crunch for the company and compelling it to knock on the doors of the banking sector. The NP margin clocked in at 14.37 percent in 2021 with a bottom-line growth of 119 percent.

Recent Performance (9MCY22)

AGTL’s topline continued to impress in 9MCY22 as it did in 2021. With the sale of 18,891 tractors during 9MCY22, which is 37 percent up from the sales volume of the same period last year, the topline of AGTL grew by a massive 73 percent year-on-year. Currency depreciation and high prices of raw materials, however, shrank the GP margin of the company to 17.74 percent in 9MCY22 compared to 23.53 percent in the same period last year. Then the exceptionally massive increase of 194 percent in the distribution cost took its toll on the OP margin. While the company hasn’t revealed the details of the gigantic distribution cost, it is possible that owing to muted local demand on the back of disastrous floods, the company might have focused on export sales which would have magnified its freight cost. Then the finance cost also jolted the bottom line not only because of several hikes in the discount rate but also because of an increase in the short-term financing facilities of the company as well as trade and other payables. The imposition of the super tax was another whammy for the bottom line which shrank by one percent year-on-year with the NP margin clocking in at 8.28 percent in 9MCY22 compared to 14.55 percent during the same period last year.

Future Outlook

While the demand for tractors is expected to rebound as rehabilitation drives have commenced with the help of the UN and other donor agencies, the decision of the Economic Coordination Committee (ECC) to allow the import of five-year-old used tractors under the Kissan Scheme doesn’t bode well for the local tractor industry. This will restrict the local producers from taking advantage of the demand recovery after the natural calamity and will continue to shrink their margins which are already under pressure due to rising raw material and energy costs, discount rate hikes, and Pak Rupee depreciation. The local tractor manufacturers appeal that the authorities revisit the announced plan and allow them to import components and accessories to manufacture the final product locally instead of importing the final product itself. This will not only kick-start the halted operations of the local tractor industry but will also benefit the related auxiliary and ancillary industries.