Millat Tractors Limited

About the company: Millat Tractors Limited was founded in 1964 to become Pakistan's leading firm in the sale of tractors, forklifts, diesel engines, and other industrial and agricultural products. Listed on the KSE, its market capitalisation is an astounding Rs 24.7 billion. In 2011, Millat set a new world record for highest ever production and sales, selling 42,000 tractors. Its market share also went up from 56 percent to around 60 percent that year, making it the country's foremost name in tractors.
Millat also made it to Forbe's list of Asia's 200 best companies under a billion. The company's high quality tractors cater to farmers with large as well as small-to-medium sized land holding. Its agricultural implements span a variety of machineries such as ploughs, tillers, diggers, and more. But by and large, these form a very small portion of the company's sales, and tractors account for around 97 percent of total sales (as of FY15).
Prior Performance A major issue in the tractor industry has been the government's on-and-off sales tax hikes and cuts; in FY11, the government of Pakistan levied a GST of 17 percent on tractor sales. This was brought down to 5 percent in the subsequent year, again raised to 10 percent in FY13, and in FY14 was once again brought up to 17 percent. As of FY15 onwards, the sales tax on tractors has remained at 10 percent. The graph of Millat Tractors' sales perfectly lines up with these whimsical changes in sales tax regime.
Despite the period of volatility for its top line, Millat managed to maintain its profitability reasonably well over the period; in fact, gross margins were actually on a slight uptrend over the period. However, the company's profitability pales in comparison to its archrival in the tractor duopoly, Al-Ghazi Tractors.
Over the same five-year period, Al-Ghazi's gross margins went from 20 percent in CY10 to an impressive 26 percent in CY14. As for net margins, Al-Ghazi enjoys an even more comfortable lead, having 18 percent net margins in CY14 - exactly twice of Millat's that year! So, while Millat still enjoys the market leadership position, it seems there is room for improvement in profitability.
Nevertheless, FY15 was a golden year for Millat Tractors. Top line growth was an astounding 38 percent year-on-year, and bottom line grew by 61 percent. As mentioned earlier, this had largely to do with the drop in GST on tractors. Moreover, fuel prices were low over the period, making tractors and relevant equipment more attractive.
Finally, Millat's exports more than doubled in FY15. However, exports account for a very small portion of the company's overall revenue pie - just 2 percent, as of FY15.
Recent Performance Just as FY15 was a phenomenal year for Millat Tractors, the new fiscal has been off to a pretty bad start. For the three months ended September, Millat's sales have dropped by 26 percent year-on-year, while net earnings have halved. This cannot be attributable to the GST, which has remained at the 10 percent mark.
This time around, the provincial governments are to blame for the fall in tractor sales. The Punjab and Sindh tractor subsidy schemes, announced in their respective FY16 budgets, have yet to be implemented. As such, potential buyers have been lying in wait and holding off their purchases. Moreover, various news sources report that Punjab and Sindh governments are mulling over completely new taxes for tractor dealers, which will bring up the prices and deter buyers.
The issue of lower commodity prices has been a major factor in declining tractor sales. Farmers' purchasing power has plummeted. As such, tractor sales have nose-dived.
Gross and net margins contracted severely, indicating dwindling profitability. This can be linked with the decrease in Rupee value against the Dollar, which has severely impacted the cost of imported component, as per the Director's Report.
Other income also had a significant impact on the bottom line, falling by 48 percent year-on-year. The major portion of the company's other income is in the form of dividend income from Millat Equipment Limited.
Outlook With commodity prices going nowhere fast, farmers' income is expected to remain suppressed. The only relief can come in the form of the much-awaited tractor subsidy schemes materialising. Until then, tractor sales are expected to remain soft.
Recently, Millat Tractors' management announced that the company has lain off over 500 workers due to declining sales and surplus built-up inventory. No money has been allocated for tractors in the PM's Kissan Package either.

==========================================================

Millat Tractors Limited

==========================================================

Rs (Million)                      1QFY16  1QFY15       YoY

==========================================================

Net Sales                          3,541   4,766      -26%

Cost of Sales                      2,960   3,848      -23%

Gross Profit                         581     918      -37%

GP Margin                            16%     19%      down

                                                   280 bps

Distribution & Marketing Expenses     72     115      -37%

Administrative Expenses              127      95       34%

Operating Profit                     381     708      -46%

Other Income                         399     768      -48%

Other Operating Expenses              28      51      -45%

Finance Cost                           2       2        0%

Taxation                             117     226      -48%

Net Profit                           252     489      -48%

NP Margin                             7%     10%      down

                                                   310 bps

EPS                                 5.69   11.03      -48%

==========================================================