Millat Tractors Limited

Millat Tractors Limited (PSX: 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 80’s 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 block, 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 of June 30, 2022, MTL has 96.86 million shares outstanding which are held by 6,630 diverse shareholders. General public is the major shareholder of MTL with a stake of 41.07 percent in the company. Directors, CEO, their spouse and minor children hold 29.43 percent of the outstanding shares 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. Around 8.2 percent of MTL’s shares are occupied by Insurance companies followed by trusts holding 4.06 percent shares. Banks, DFIs, NBFIs and Pension funds represent a share of 2.06 percent while remaining ownership is distributed among other categories of shareholders.

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 for the next two years, only to nosedive again in 2023. MTL’s bottomline only posted a year-on-year growth in 2021 among all the years under consideration. Its margins which were waning until 2020 greatly revived in 2021 and then slipped again in 2022. In 2023, while gross margin inched up, operating and net margins continued their downhill journey (see the graph of profitability ratios). The detailed performance review of each of the years under consideration is given below.

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 of sugar-cane crop as support price wasn’t actively managed. Besides, wheat crop was damaged by heavy downpours in Southern Punjab. Succumbing to industry-wide downturn, MTL’s sales volume dropped by 25 percent year-on-year to clock in at 32,019 units in FY19. This culminated into a 19 percent year-on-year drop in its topline. However, the market share of the company improved from 61 percent to 64 percent. Owing to low sales volume, the company’s cost of sales also slid yet was unable to sustain its gross profit margin which dropped from 22 percent in FY18 to 19 percent in FY19. Lower payroll expense and trademark fee particularly contributed towards curtailed operating expense in FY19. Net other income also plunged by 57 percent year-on-year in 2019 mainly because of no fair value gain earned on short-term investments in 2019 coupled with a skimpy return on bank deposits and TDRs. Operating profit shrank by 34 percent year-on-year in 2019 while OP margin dropped from 20.2 percent in FY18 to 16.5 percent in FY19. Then finance cost gave a major hit to the bottom line mainly as the company obtained a hefty sum of short-term borrowings during the year. Moreover, high discount rate also played its due role in pushing up the finance cost. As a consequence, bottom line took a 32 percent year-on-year dive in FY19 to clock in at Rs.3638.05 million with an EPS of Rs.64.9 from Rs.120.43 in 2018. NP margin also receded from 13.85 percent in 2018 to 11.68 percent in 2019.

FY20 was another rough year for MTL characterized by Covid-19 pandemic. Although 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. Consequently, MTL’s topline plummeted by 26 percent year-on-year in FY20. While the cost of sales slid due to low capacity utilization of 69 percent in FY20 versus 107 percent in FY19, per unit cost surged on account of Pak Rupee depreciation. This squeezed the gross profit by 29 percent in FY20 with GP margin falling down to 18.5 percent. Operating expense was in check due to reduction in the number of employees from 388 in FY19 to 360 in FY20. Lower trademark fee also kept operating expense in check in FY20. The major blow to the operating performance of MTL came on the back of a massive drop in other income mainly because of low dividend income. Finance cost continued to bite the bottom line despite low discount rate towards the end of the year. This was mainly because of markup paid on short-term borrowings. MTL’s net profit narrowed down by 41 percent year-on-year in FY20 to clock in at Rs.2150.55 million with an EPS of Rs.38.36 and NP margin of 9.37 percent.

After two jagged years, MTL’s top line posted an impressive year-on-year growth of 92 percent in FY21. This was backed 71.5 percent growth in volumes translating into an off-take of 35,515 units in FY21. The economy started showing signs of recovery post pandemic with agriculture sector growing at the rate of 2.8 percent in FY21. Wheat bumper crop coupled with 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. Due to favorable exchange rate for most part of the year, gross profit enhanced by 118 percent year-on-year in FY21 with GP margin jumping up to 21.09 percent, 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 51 percent in FY21. Administrative expense also escalated by 29 percent in FY21 on account of higher payroll expense despite reduction in HR tally to 346 in FY21. Other expenses grew by 108 percent year-on-year in FY21 on account of increased provisioning done for WWF and WPPF. However, it was offset by a splendid growth of 163 percent in other income driven by robust dividend income from Millat Equipment Limited, gain on sale of short-term investments and return on bank deposits and TDRs. This explained the staggering 147 percent year-on-year rebound in operating profit with OP margin reaching 17.95 percent in FY21. 96 percent year-on-year drop in finance cost as MTL obtained significantly lesser short-term borrowings during the yearcoupled with monetary easing backdrop further strengthened the bottom line in FY21.The net profit of MTL measured up by 169 percent year-on-year in FY21 to clock in at Rs.5780.93 million with an EPS of Rs.59.68 and NP margin of 13.15 percent.

In FY22 too, MTL followed the growth trajectory despite bleak macroeconomic and political backdrop. High energy cost, rise in 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 increase in tractor prices. The rise in the cost of raw materials as well as high fuel and power charges wreaked havoc on company’s cost which squeezed the GP margin to 19.11 percent in FY22. Selling and administrative expense hiked by 9 percent and 12 percent respectively on account of high inflation which drove the payroll expense up despite reduction in HR count to 334 in FY22. Higher trademark fee was also a key driving force of elevated operating expense in FY20. MTL also earned a net other income of Rs.271.67 million in FY20, up 430 percent year-on-year which was the consequence of handsome dividend income. This resulted in 13 percent bigger operating profit recorded in FY22, albeit, OP margin marched down to 16.66 percent. The major off-putting factor which marred MTL’s 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 non-repayment of sales tax refunds of Rs.5.7 billion by FBR. Hence, the company had to obtain large amount 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. As a result, the net profit posted a year-on-year dive of 11 percent in FY22 to clock in at Rs. 5407.01 million with NP margin clocking in at 10.13 percent. EPS also sank to Rs.28.19 in FY22

Recent Performance (FY23)

The devastating floods in the southern region of the country proved to be the worst beginning of FY23. Shrunken pockets of farmer community squeezed the tractor demand since the beginning of the year. This coupled with sky-rocketed level of inflation, Pak Rupee depreciation, high discount rate, spiked energy charges and import restrictions created chaos in the overall automobile industry which is highly import oriented. According to the data released by PAMA, MTL produced 19,097 units in FY23 which were 45.3 percent lesser than the production volume recorded by the company in FY22. This translated into a capacity utilization of 64 percent in 2023 which was even lesser than FY20 level. MTL’s topline slid by 17 percent year-on-year in FY23, coming on the back of 47 percent drop in volume. Cost of sales inched down by 18 percent year-on-year, resulting in 13 percent drop in gross profit in FY23. However, GP margin rose to 20 percent due to upward revision in the prices of tractors in 2023 to pass on the impact of cost hike to the customers. Operating expense surged by 15 percent year-on-year in FY23 due to high inflation. MTL booked a net other expense of Rs.319.01 million in FY23 which was due to significantly lower dividend income earned during the year. This trimmed down the operating profit by 25 percent year-on-year in FY23 with OP margin slipping to 15.18 percent. 497 percent higher finance cost incurred in FY23 was the consequence of unparalleled discount rate and considerably higher long-term as well as working capital related borrowings in FY23. MTL’s bottomline slid by 38 percent year-on-year in FY23 to clock in at Rs.3377.64 million with an EPS of Rs.17.61 and NP margin of 7.64 percent – the lowest among all the years under consideration.

Future Outlook

With the economy trapped in the recessionary headwinds, the purchasing power of local consumers has considerably dropped, let alone the farmers who are already suffering from crop and livestock damage owing to the recent floods. This considerably reduced the demand for tractors. The government has been promising to revive the agriculture industry by providing subsidized loans to the farmers. This coupled with the bumper wheat and cotton crop expected in FY24 may turn the fortunes of the agriculture sector and its allied industries including the tractor industry.