Tough times for Al-Ghazi

Having recovered handsomely from last years GST fiasco, Al-ghazi tractors has once again landed in choppy waters after the government decided to raise sales tax on farm mechanization equipment including tractors to 10 percent, a decision which came into effect around January 2013.
The GST hike subsequently stagnated tractor market pushing down margins for the leading manufacturers in the country and scaling back demand.
For Al-Ghazi, the half-year mark is, therefore, a tale of many sorrows, with sales for the firms tractors having been slashed by 40 percent year on year.
During the first half ending June, the firm, which is the sole manufacturer of the New Holland (Fiat) tractors in Pakistan, managed to deliver only 2,252 tractors to its customers, compared to 6,004 tractors delivered in the same period of last year.
The sharp decline in tractor sales comes after major price adjustments-two of which have already been made this year by Al-Ghazi-which have been in lieu of adjusting the GST hike and the rising costs of inputs. Overall, the firm has increased the prices of various models by as much as 5 percent over the course of the last 6 months.
The reduction in purchasing power of the farmers on account of higher input costs and lower crop prices reduced lending by Zarai Taraqiati Bank, and non-availability of cheaper WAPDA power leading to increased reliance on high priced alternate sources have all been at play this year.
Additionally, fresh sales have also been jeopardized due to the dumping of the tractors bought under the Sindh Tractor scheme in the open market. Here a quick recap is warranted: Last year, the government provided small farmers subsidized tractors, with prices slashed by as much as Rs300,000 off from market rates. The government distributed six thousand units to farmers at subsidized rates during Apr-May 2012 alone under the Punjab Green Tractor and Sindh Tractor schemes.
According to the sources, these very same tractors are now being sold off in the market at a cut price rate - despite various conditionalities that prohibited their resale. Some "investors" have reportedly found a way around the regulations. Reportedly, the subsidized tractors are also being smuggled across the border, where they are re-painted, tweaked and then sent back into Pakistan.
During the last four months, however, things have begun to look slightly better for Al-Ghazi tractors, with quarter-on-quarter sales having more than doubled during the 2QCY13 as some of the pent-up demand, which had been scared off by the rising tractor prices, finally emerged out of hiding.
Going forward, while there is little to no indication that the GST hike will be revised; some analysts predict that improved investor confidence and a better energy situation might resolve into better times for tractor manufacturers.
For Al-Ghazi, one of the things to look forward to remains the ongoing Sindh Tractor scheme. Additionally, the impending launch of improved tractor models and increased production of tractors with a higher horse power might also lead to improved demand.

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Al-Ghazi Tractors Ltd.

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Rs (mn)                         1HY12       1HY13         Chg

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Sales                           7,955       4,752        -40%

Cost of sales                   6,497       3,647        -44%

Gross profit                    1,458       1,104        -24%

Gross profit margin            18.33%      23.23%     4.9 ppt

Distribution and

other selling expense              42          49         17%

Administrative expenses            71          84         18%

Finance cost                        1        0.14        -86%

NPAT                            1,020         739        -28%

Earning per share (Rs)           23.7       17.22           -

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