Millat Tractors Limited

Millat Tractors Limited (MTL) is a public limited company established in 1964. Its first assembly plant was set up in 1967 in Lahore to assemble tractors imported in semi-knocked down condition. In the ’80s after the government's decision to indigenize tractors, the company collaborated with Massey Ferguson and established sophisticated manufacturing facilities for the machining of components like engine blocks, sump, cylinder head, axle housing, transmission case, hydraulic cover, etc. In 1992, the company established its tractor assembly plant with a capacity of 16000 tractors on a single-shift basis.

In the subsequent years, the company further diversified its product line. As of now, MTL is engaged in the manufacture of internationally acclaimed tractors, diesel-generating sets and prime movers, diesel engines, and forklift trucks. MTL is also involved in the sale, implementation, and support of Industrial and Financial System (IFS) applications locally and abroad.

As of June 30, 2022, the company has an annual capacity of 30,000 tractors per annum on a double-shift basis; however, the company often produces beyond its capacity by working on overtime schedules to meet the high demand.

Pattern of Shareholding

As per the annual report of FY22, the company has an outstanding share capital of 96.86 million shares held by 6630 diverse shareholders. The major shareholder of MTL is the general public with a stake of 41.07 percent in MTL’s shares. Directors, CEO, their spouses, and minor children hold 29.43 percent of the outstanding share capital of MTL. Associated companies, undertakings, and related parties grab the next spot with a proportion of 11.2 percent in the company’s share capital. Insurance companies take up 8.2 percent of MTL’s shareholding. This is followed by trusts holding 4.06 percent shares. Banks, Development Financial Institutions, Non-Banking Financial Institutions, and Pension funds represent a shareholding of 2.06 percent. The remaining outstanding shares are held by other categories of shareholders such as NIT and ICP, Modarba and Mutual Funds, Joint Stock Companies, etc.

Historical Performance (2018-2022)

The top line of MTL tells a mixed tale of ups and downs. While it plunged in FY19 and FY20, it rebounded in the subsequent years to pay off for what it lost in the depressing years. FY19 was a rough year for the tractor industry as it posted a decline in output and off-take after years of excellent performance. Industry-wide sales clocked in at 50,000 units as against 70,000 units in FY18. The retarded sales volumes were led by diminishing agricultural growth on account of water shortage as well as low demand for sugar-cane crops as support price wasn’t actively managed. Besides, the wheat crop was damaged by heavy downpours in Southern Punjab.

Succumbing to the industry-wide downturn, MTL’s sales volume dropped by 25 percent year-on-year to clock in at 32,019 units in FY19, however, the market share of the company improved from 61 percent to 64 percent. Owing to low sales volume, the company also contained its cost of sales and operating expenses, yet was unable to sustain its gross profit margin which dropped from 26.42 percent in FY18 to 21.32 percent in FY19, and operating profit margin which dropped from 22.5 percent in FY18 to 16.23 percent in FY19. Other income didn’t fare well and dropped by 26 percent year-on-year in FY19 mainly because of changes in the fair value of short-term investments and skimpy return on bank deposits and TDRs. Then finance costs gave a major hit to the bottom line mainly as the company obtained a hefty sum of short-term borrowings during the year. Moreover, a high discount rate also played a due role in pumping the finance cost up. As a result of all the off-putting factors, the bottom line took a dive of 41 percent year-on-year in FY19.

FY19 was followed by another rough year dominated by the Covid-19 pandemic. Although the agriculture sector performed well and posted a year-on-year growth of 2.6 percent in FY20 as against 0.5 percent in FY19, strict lockdowns and discontinuation of routine business activity took a toll on MTL’s sales volume which dipped to 20,707 units in FY20, translating into a year-on-year decline of 35 percent. The major blow to the bottom line came on the back of a massive drop in other income mainly because of low dividend income on short-term investments. Finance costs continued to bite the bottom line despite the low discount rates mainly because of the markup paid on short-term borrowings. NP margin stood at 8.22 percent in FY20 vis-à-vis 10.97 percent in FY19.

After two jagged years, MTL's top line touched the crest in FY21. The top line posted an impressive year-on-year growth of 91 percent. This is backed by the volumetric growth of 71.5 percent to clock in at 35,515 units in FY21. The economy started showing signs of recovery post-pandemic with the agriculture sector growing at the rate of 2.8 percent in FY21. Wheat bumper crop coupled with an increase in minimum support price for various crops by the government resulted in vigorous cash flows and improved liquidity position for the farmers. The company also achieved the highest-ever export sales volume of 2000 tractors in FY21. Carriage and freight charges increased significantly on account of export sales. This coupled with the trademark fee paid to Massey Ferguson played a major role in enlarging the distribution cost by 61 percent. Other expenses also extraordinarily grew on account of the Workers’ profit participation fund and Workers’ welfare fund. Then the massive rise in other income and drop in finance costs as MTL obtained significantly lesser short-term borrowings during the year further strengthened the bottom line in FY21. The net profit margin of the company stood at 14.38 percent in FY21 which is second to the level seen in FY18.

FY22 also followed the growth trajectory that started in FY21 despite the bleak macroeconomic backdrop. High energy costs, damage to agricultural output owing to floods, a rise in the discount rate, and sharp depreciation in currency played tricks on the company’s performance. The off-take marginally reduced by 510 units, however, the top line grew on account of an increase in tractor prices. The rise in the cost of raw materials as well as high fuel and power charges wreaked havoc on the company’s cost which squeezed the GP margin. The major off-putting factor which marred the bottom line in FY22 was the sky-rocketed finance cost which increased by over 3.4 times. This came on the back of several hikes in the discount rate. Moreover, the company faced liquidity issues during the year due to the non-repayment of sales tax refunds of Rs.5.7 billion by FBR. Hence, the company had to obtain a large number of short-term borrowings to meet its working capital requirements. Then imposition of super tax increased the average effective tax rate for FY22 to 37.52 percent as against 26.63 percent in FY21. The profit after tax posted a year-on-year dive of 11 percent in FY22 with NP margin clocking in at 10.66 percent as against 14.38 percent in FY21.

Recent Performance (1QFY23)

The macroeconomic challenges which emerged in FY22 aggravated in 1QFY23. The energy crisis due to the non-availability of LNG owing to the Russia-Ukraine conflict has increased energy prices manifold. Moreover, the Pak Rupee depreciation has doubled the price shocks for the local operating companies.

MTL was able to sell only 3194 units in 1QFY23 compared to 7197 in a similar period last year. While the local demand remained muted on account of floods which affected two-thirds of the country, exports showed a year-on-year increase of 88 percent during 1QFY23.

Whereas the company was able to contain its cost and operating expenses, general inflation didn’t spare and the margins considerably contracted. Finance cost blew away the bottom line by ballooning by 8.6 times due to a high discount rate and pending sales tax refund which continued to create a liquidity crunch for the company and forced it to go for hefty short-term borrowings.

The net profit margin for the period stood at 7.25 percent in 1QFY23 versus 13.95 percent during the same period last year.

Future Outlook

With the economy trapped in the recessionary headwinds, the purchasing power of local consumers dropped, let alone the farmers who are already suffering from crop damage owing to the recent floods. This has considerably reduced the demand for tractors.

While the government has been promising to revive the agriculture industry by providing subsidized loans to the farmers and reducing the custom duties on CBU agricultural tractors and their CKD kits, whether or not the tractor companies pass on this benefit to the farmers is debatable as the tractors companies are sitting on the piles of unsold inventory and are also suffering from liquidity problems due to nonpayment of a sales tax refund by FBR.

The decline in the agricultural sector’s output wouldn’t only mar the tractor sales but also risk food security and would lead to more imports in the food category. With foreign exchange reserves standing at alarmingly low levels and Pak Rupee reaching the record lowest value, additional food imports seem like a farfetched dream.

Tractor companies have already shut down their operations owing to muted demand from the agricultural sector. How the government instills life in the dull economy is yet to be seen.