Tractors: AL-GHAZI TRACTORS LIMITED - Analysis of Financial Statements December 2004 - June 2008
Al-Ghazi Tractors Limited (AGTL) was founded in 1983 and is headquartered in Karachi. The company engages in the manufacture and sale of agricultural tractors, implements, and spare parts. It manufactures tractors of various models, including 480-S (55 horsepower), GHAZI (65 horsepower), 640 (75 horsepower), and 640 Special (85 horsepower).
Al-Futtaim Industries Company LLC, of UAE bought 50.02% shares in AGTL under privatization process while 43.17% shares are held by CNH Global NV, with whom AGTL has entered into a collaboration agreement for manufacturing new Holland brand of tractors. This agreement is expected to last till April 2016. The company has completed its capacity expansion in FY06, as a result enhancing the capacity by 100%. Now, with an annual assembling capacity of 30,000 units and capacity utilization of more than 100%, Al-Ghazi Tractors Limited (AGTL) is the country's largest tractor manufacturer.
INDUSTRY OVERVIEW
At present there are two tractor companies in the country which are involved in manufacturing of indigenized tractor. These are Al-Ghazi Tractors Limited which has approximately 53% of the market share followed by Millat Tractors which has a market share of approximately 42%. Millat Tractors Limited produces Massey Ferguson Tractors under franchise of AGCO while Al-Ghazi Tractors is involved in manufacturing of Fiat New Holland tractors and is an entity of foreign UAE-based Group Al-Futtaim. Dewan Autos has established a manufacturing plant with a capacity to produce 9,000 tractors per annum. The new tractor would be known as Dewan Tumosan Tractor DT-550, 55HP.
The total demand for tractors in the country is currently 77,761 units while the total production in 2008 is estimated to be 53,470 units. However, from July 2008 to March 2009, 42,220 tractors were produced and both the two largest tractor manufacturers are on target to produce around 60,000 tractors this year. Therefore, when the capacity of 9,000 tractors of Dewan Autos would come online, the demand and supply gap will be reduced.
The cost of Indian and Chinese tractors is much higher than locally produced units of the same specifications. The main reason for the high competitiveness of local tractors is that the models commanding 80 percent of the market had a locally-made component level of 91 percent. 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 budget 2007-08, GoP deregulated the selling prices of tractors. Now tractor manufacturers can increase the selling prices of tractors in order to support their reduced margins because of higher steel prices. Thus any upward revision in tractor's prices will improve the profitability of the company. However, the tractor industry has suffered due to inconsistent and unstable government policies which include allowing imports of tractors on zero duties and giving subsidies on them which is very harmful for the local tractor manufacturers.
There is also currently the problem of delivery of trucks whose 100% advance payment has been made by the farmers and the farmers would have to wait for a minimum of 8 to 10 months for Massey Ferguson (MF) and 16-18 months for Fiat to get the supply. The farmer has not only to pay the mark-up to the banks till the delivery, but also has to bear the rental cost of tractor he uses to plough the lands during the period between booking and delivery. Moreover, the companies have imposed condition of non-refundable advance money in case of delays in delivery and no mark-up is paid to the farmer.
FINANCIAL YEAR 2008 PERFORMANCE
The company's performance remained unsatisfactory in FY08 as it suffered losses for the first time in the last five years. This was due to a 4.5% decline in its gross profits and a 12% decline in its profit after taxes as compared to FY07. This was due to a number of reasons. Firstly, the stoppage of the promised subsidy amount of Rs 200,000 per tractor by the Punjab government under the Green Tractor Scheme. The company had booked orders under this scheme and the company had to stop delivery of trucks as it did not receive the subsidy amount from the government.
AGTL had finally given those tractors on discount rates in the agreed prices. Secondly, the poor performance by major crops along with the lack of availability of agricultural credit is hampering the demand for tractors. There is a Rs 303 billion gap in the demand and supply of agricultural credit. Also, Zarai Taraqiati Bank (ZTBL's) loaning for tractors, which once accounted for 99% of tractor sales has over the years shrunk to less than 20%. Lastly, bad crops, dismal law and order situation, prolonged political uncertainty and soaring inflation of more than 20% also contributed to the decline in company's profitability.
The company's sales grew by 11% in FY08 as compared to FY07. This was due to an increase in the number of tractors sold from 26,380 in 2007 to 27,550 in 2008. However, the 11% increase in sales was overshadowed by a 14% increase in the company's cost of goods sold which resulted in a 4.5% decline in company's gross profit. The company's cost of goods sold increased on the back of rising inflation that increased the cost of raw materials and the salaries paid.
AGTL also had a 12% and a 6% increase in its distribution and its marketing expenses respectively. Apart from this the company also had a 28% decline in its other operating income due to significant decline in its return in deposit accounts. All these factors contributed to a 12% decline in the company's profit after taxes. This was the first time in the last five years that the company's profitability has declined. This decline also resulted in a 12% decrease in its EPS which declined from 29.52 in FY07 to 25.93 in FY08.
The company's asset management ratios deteriorated during FY08. AGTl's inventory turnover declined from 29 days in FY07 to 69 days in FY08. This was due to a 170% increase in the company's stock-in-trade. However, the company's Days Sales Outstanding (DSO) improved from 0.96 in FY07 to 0.25 in FY08 due to a 70% decline in the company's trade debt.
In spite of suffering losses the company's liquidity position in FY08 as compared to FY07. The company's current ratio improved by 17% as compared to the same period last year (SPLY). This was due to a 10% decline in current liabilities. However, due to delays in refunds of sales tax by five to six months instead of two weeks by the Federal Board of Revenue (FBR) is creating liquidity problems within the industry as it has around Rs 1.5 billion refunds of tractor industry remain stuck up with FBR which creating liquidity problems for the industry.
The company's debt to assets ratios also improved from 43.59% in FY07 to 37.51% in FY08. AGTL has 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.
AGTL's profitability which had been performing decently in the previous years declined for the first time in the last five years in FY08 as compared to the same period last year (SPLY). All of its major profitability ratios which include its gross profit margin ratio, return on assets (ROA) and return on equity (ROE) ratios declined in the range of 15% to 20%.
This was mainly due to withdrawal of subsidies worth Rs 200,000 per tractor under the Green Tractor Scheme and also due to increase in the companies of production on account of higher inflation. The company's price earning ratio improved to Rs 9.7 in FY08 from Rs 8.5 in FY07. This was due to an increase in share prices to Rs 252/share.
The company's P/E ratio increased despite a 12% decline in the company's EPS from Rs 29.52 in FY07 to Rs 25.93 in FY08. The company's book value per share also increased Rs 179.39 in FY07 to Rs 206.24 in FY08. However the company's dividend per share remained constant at Rs 17.5 per share.
FINANCIAL PERFORMANCE (FINANCIAL YEAR 2004 - FINANCIAL YEAR 2007)Amidst the shortages 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 in FY'07, with 26,364 tractors delivered compared with 26,250 in FY'06, thus bringing the total sales for the year 2007 to Rs 9.08bn compared to Rs 9.02bn in the same period last year.
The company earned a pre-tax profit of Rs 1.914 billion compared to Rs 1.910 billion in 2006. The post-tax profit for the year 2007 recorded an increase of 3.1% - up from Rs 1.229 billion in 2006 to Rs 1.267 billion in 2007, with Rs 647 million going to the tax authorities as income tax.
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 above 2, AGTL fares reasonably better than its competitors.
Tractor orders from ZTBL are declining whereas cash advances from customers are increasing. Loaning from the ZTBL in particular continues to fall. With 9,871 tractors booked through ZTBL in the fiscal 2005-06, the number dropped to 6,650 tractors in 2006-07. This is because credit disbursement by the banks for agriculture has decreased by more than 50%.
Moreover, according to the SBP report, a number of small farmers are unable to avail the facility mainly due to inappropriate documentation such as non-availability of pass books resulting in hindrance to these farmers, eroding away a major part of tractor business from 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.
Fixed selling price since 1998 has hurt 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 in FY06, along with the efficiency on part of AGTL towards cost reduction, resulted in declining margins in FY07. It has nevertheless, improved the ROE and ROA of AGTL in FY07.
Asset management ability of the company, though deteriorating in 3Q07, has improved on a YoY basis. This can be attributed to speedy delivery, better management and control over the business processes. Despite a very small DSO we see a sharp increase in FY07 from same period last year mainly due to increased receivables.
However, the overall FY07 operating cycle declined for the company.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 in FY06 mainly attributable to new plant and equipment and high revenue reserves respectively.
However, the company fared better in its asset utilization with increasingly better capacity utilization and further extensions in FY07. 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 meagre threat in the wake of increase in KIBOR. Thus, interest-paying capacity of AGTL (TIE Ratio) is fairly high, even compared to its competitors. Amongst the short-term liability portion of the balance sheet it is to be noticed that the main chunk is contributed by advance payments of the customers, which does not consist of mark-up.
This has allowed AGTL to invest in open-ended mutual funds considerably almost doubling the amount of investment carried on the balance sheet. Also, the mark-up is earned on the bank deposits account for a major proportion of other operating income. 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 performed well in recent years with its shares fetching the highest value of all listed stocks, thus maintaining lead over other automobile sector companies in Pakistan.
The share value reached an all time high and recorded a peak of Rs 298 for its five-rupee share, thus giving a market cap of Rs 12.795 billion to the company. The increasing BVPS and P/E multiple further signify investors' confidence in AGTL. In FY07, the company announced a cash dividend of 350%. With the majority shareholding being with Al-Futtaim Industries Company LLC, UAE and CNH Global NV, Netherlands, they stand to be the major beneficiaries of the generous dividend payouts.
FUTURE OUTLOOKThe company suffered decline in profits in FY08. However, in the future, stable government policies are a key for improving the company's profitability. The Cabinet has approved the Benazir Tractor Scheme in May 2009 which will not only have a positive outcome for the growth of the company, but also for the overall growth of the tractor industry.
The scheme will provide 25,000 tractors at discounted rates to farmers across the country through a ballot system. The Government will bear half the cost up to a maximum of Rs 200,000 while the rest of the amount would be advanced to small farmers @ 8 percent mark-up through the Zarai Taraqiati Bank and the government has already allotted Rs 72 billion for the farmers.
However, there are a number of concerns that the government needs to address. Firstly, ZTBL's loaning for tractors needs to be improved considerably. ZTBL once accounted for 99% of tractor sales has over the years shrunk to less than 20%. In the federal budget 2009-10, a high priority is expected to be given to agricultural sector and credit allocation to the sector has been increased. This is expected to increase credit disbursement for tractors by ZTBL and other commercial banks.
However, another threat to this sector is that the government has allowed the duty free import of import tractors and will also provide high subsidies on them. This would affect the local tractor manufacturers and discourage further expansion in this sector which is necessary to bridge the demand supply gap. These imports could result in loss of jobs for 200,000 skilled and semiskilled Pakistani workers, causing shut down of 250 vending units and wastage of billions of rupees in the vending industry.
There is also a need for local manufacturers to ensure the timely delivery of trucks whose 100% advance payment has been made by the farmers. The farmer has not only to pay the mark-up to the banks till delivery, but also has to bear the rental cost of tractor he uses to plough the lands during the period between booking and delivery.
There is need to enact stimulus packages for increasing sale of tractors via banks, to reduce mark-up (to around 7%) and to create special agricultural development fund for purchase of tractors. This would help to increase mechanization of farming activities in Pakistan, increase tractor manufacturing activities and in the event of fall in bookings it would help protect interest of AGTL's vendor associates who supply 92% local content to the company. Apart from this political certainty and future economic outlook also have a vital role to play in the growth of the company. The current political situation in Swat and NWFP will also have negative repercussions as a decent percentage of company's tractors are sold in that province.
=======================================================================================
AL-GHAZI TRACTORS
=======================================================================================
Dec'04 Dec'05 Dec'06 Dec'07 Dec'08
=======================================================================================
LIQUIDITY RATIO
---------------------------------------------------------------------------------------
Current Ratio 2.63 1.70 1.90 2.24 2.62
---------------------------------------------------------------------------------------
ASSET MANAGEMENT
---------------------------------------------------------------------------------------
Inventory Turnover(Days) - (RHS) 35.11 30.14 34.38 28.51 69.31
Day Sales Outstanding (Days) 0.41 0.28 0.28 0.96 0.25
Operating cycle (Days) - (RHS) 35.51 30.42 34.67 29.47 69.57
Total Asset turnover 1.61 1.25 1.06 1.33 1.43
Sales/Equity 2.57 2.94 2.18 2.36 2.28
---------------------------------------------------------------------------------------
DEBT MANAGEMENT
---------------------------------------------------------------------------------------
Debt to Asset(%) - (RHS) 37.42 57.60 51.23 43.59 37.51
Debt/Equity (Times) 0.60 1.36 1.05 0.77 0.60
Times Interest Earned
(Times)-(RHS) 238.66 692.84 218.58 636.61 615.56
Long Term Debt to Equity(%) 0.72 0.59 0.84 0.98 1.05
---------------------------------------------------------------------------------------
PROFITABILITY (%)
---------------------------------------------------------------------------------------
Gross Profit Margin 23.73 18.12 20.71 18.21 15.61
Net Profit Margin 14.32 13.63 13.71 13.96 11.010
Return on Asset 23.08 16.97 14.58 18.56 15.71
Return on Common Equity 36.88 40.02 29.88 32.91 25.14
---------------------------------------------------------------------------------------
MARKET VALUE
---------------------------------------------------------------------------------------
Earning per share 22.47 24.71 28.63 29.52 25.93
Price earning ratio 6.94 7.97 7.50 8.52 9.717
Dividend per share 15.00 17.50 17.50 17.50 17.5
Book value 134.04 143.09 165.36 179.39 206.248
Number of shares issued 19,516.50 21,468.20 21,468.20 21,468.20 42,936,400
=======================================================================================
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].
Comments
Comments are closed.