Unarguably one of the most successful management buyout stories of Pakistan, Millat Tractors (PSX: MTL) has become the largest tractor manufacturing company in the country. The company was founded in 1964 and started off operations with imports of Completely Built Unit (CBU) of tractors and selling them. MTL was nationalised in 1972 and after twenty years the company was bought out by the management in 1992.
Subsequently, Millat has ventured into generating sets and either acquired or set up other subsidiaries for similar business. In 1993, Bolan Casting was bought; Millat Equipment was set up later next year and in 2002, Millat Industrial Products was established. The company signed an export agreement with AGCO Corporation in Africa and since has been finding market access abroad.
MTL's core business is the manufacture of agricultural tractors, diesel engines, forklifts, and a wide range of agricultural implements. It also has material testing and gauge control laboratories. The current capacity of the company's plant is more than 35,000 units annually in a market of about 60,000 tractors.
Ownership, shareholdings and investments
Millat Tractors being the holding company has a number of unlisted subsidiary and associate companies. Millat Industrial Products Limited (MIPL), an unlisted public company where MTL holds 64.09 percent equity. The company is in the business of manufacturing of industrial and domestic vehicular batteries, cells and components. Tipeg Intertrade DMCC is limited liability Company based in Dubai where MTL holds 75 percent equity. The company trades machinery and heavy equipment.
Millat Equipment Limited (MEL) is another unlisted public company where MTL holds 45 percent equity. MEL manufactures automotive, agricultural and industrial vehicles parts and components. Bolan Castings Limited (BCL) is a public limited company and was acquired by MTL in 1993. Millat holds 46.26 percent equity in BCL. The company manufactures castings for tractors and automotive parts.
And Millat Tractors isn't stopping there. During FY17, the company signed on a partner network program with a Swedish software solution company IFS for MTL's potential venture into IT solutions. The more interesting venture is into the assembly of cars and commercial vehicles. The company will be investing 18 percent (Rs 1.53 billion) in equity of Hyundai Nishat Motor (HNML). HNML is a new automobile venture between Korean Hyundai and Nishat Mills to manufacture cars and light commercial vehicles in Pakistan. Millat will now be a part of the deal.
Operational and financial performance Even though volumetric sales have been stable for the company during FY14 and FY16 within a range of 32,000 to 35,000, MTL's revenues tended to fluctuate due to the variation in sales tax. In FY11 a 17 percent GST on tractor sales was imposed which was brought down to 10 percent in FY13 but jumped back to 16 percent in FY14, which had exerted a downward pressure on the top-line. Finally, the GST was brought down to 5 percent in FY17 and other incentives were also provided to agricultural sector which had a positive impact on revenues.
MTL's margins improved on account of higher localisation from 20 percent in FY16 to 24 percent during FY17. Though exports have a very small share in total revenues, the company entered into a licensing agreement with AGCO that would allow the company to enter exporting markets. Between FY13 and FY17, exports share has remained less than 3 percent for Millat. The agreement will help boost exports for MTL going forward.
Recent snapshot The company's net sales grew by an impressive 34 percent in FY18 on a year on year basis, which was mainly due to an up tick of 24 percent in tractor sales from 42,707 units as compared to 34,506 units in FY17. The rupee depreciation has eroded gross margins for the company by 175 bps as tractor's localisation component is more than 90 percent. MTL also witnessed a massive surge in other income which went up by 72 percent as compared to the same period last year. This was attributable to dividend received from the group's other companies and return on commercial bank deposits. The company announced a sizable dividend of Rs 60 for 4Q, which took the full year dividend to Rs 120 per share.
Future outlook With the new PTI government looking to turn the fortune of farmers, it is expected that agriculture friendly policies will be doled out to further incentivise the sector. This will bode well for MTL and tractor demand is expected to remain strong in the coming years as well. The company expects the overall tractor sales to cross the 70,000 unit mark this year and as MTL has a 60 percent share, that will make its tractor sales somewhere around 43,000 units.
MTL's equity contribution into the Hyundai-Nishat automotive manufacturing venture is also promising. The disruption that Hyundai Nishat could potentially create in the industry is huge and Millat being part of the deal will bode well for the company's financials and its future in the larger automotive industry picture.
Lastly, even though rupee depreciation has affected the company's margins, the flip side is that it might allow the company to take advantage of the now much cheaper domestic tractor prices and boost its export share in international markets.
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Pattern of Shareholding
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Shareholders Category Percentage
of holding
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Directors, CEO, their spouses and minor children 29.60%
Associated Companies, Undertakings & Related Parties 7.22%
NIT and ICP 1.34%
Banks, DFIs, Non-banking Financial Institutions 0.88%
Insurance Companies 10.55%
Modarabas and Mutual Funds 3.96%
General Public (Local) 46.45%
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Source: Company accounts
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