Millat Tractors Ltd

For a firm that more than trebled its third quarter profits for the period ending March 2015, shareholders in Millat Tractors Ltd (MRL) haven't exactly been responding with excitement. The firm's stock price increased only about 1.9 percent on April 22 - the day when MTL's latest results were announced - and has risen 1.2 percent since then. That's not exactly a great reception for the kind of financial performance MTL has posted in the fiscal year to date - especially considering that its stock had already been rather depressed between January 1 to April 22 - falling 5 percent in that period when the broader market was up 5 percent.
Background
Formed in the year 1964, MTL manufactures Massey Ferguson Tractors in Pakistan. The firm has been a leading assembler in tractors, having set up a specialised tractor assembly plant in 1992. The plant had a production capacity of 16,000 tractors on a single shift basis. From an initial production of 8,000 units with two product variants, MTL has expanded up to 45,000 units with eight different models. The company has also been expanding into areas beyond farming, and hence began production of Generating Sets in 1994 and a 3-Ton Fork Lift in 2002.
MTL is part of the Millat Group of Companies, which is also involved in the manufacturing of hi-tech automotive gear, automotive castings and industrial and domestic batteries. The group is headed by Sikandar Mustafa Khan and is based in Lahore.
More recently, a 'Green Engine Test Lab' has been set up at MTL's headquarters to test the emission compliant green engines. The company says that this facility has opened vast avenues of tractor export around the world. The company is in the process of finalising export and trade agreement with its principal AGCO which will likely supplement its growth targets in the export segment. Meanwhile, Millat Group's new trading company TIPEG Intertrade JLT in Dubai has initiated its business activities to promote exports and to cater import needs of MTL. At present, MTL's tractor exports are barely 1.2 percent of its total tractor sales.
Recent financial performance
From a sales volume of 40000-42000 units per year between 2010 and 2011, MTL's sales volume had tanked to 21,111 units as of last fiscal year - the year when the company marked its 50 years of existence. The reason: relatively slower growth in farming GDP, which directly affected the buying power of the farmers. Another reason behind that decline was the increase in sales tax from 10 percent to 16 percent with effect from January 2014 that had been a major blow to the tractor industry.
Moreover, the company said last year that "contrary to the expectations, no subsidy scheme was launched by the federal and provincial governments. Although ZTBL and other commercial banks enhanced tractor lending with 10,000 tractors, yet this could not tackle the unpleasant impact of price hike and absence of subsidy schemes."
Despite these odds, however, the company was able to retain its market share of 64 percent in FY14, and thereby remained as the industry leader. More importantly, the retention of market share came without taking a hit on the margins. MTL's gross margins stood firm at 17.9 percent in FY14 as against 17.6 percent in FY13 and 17.06 percent in the year before.
Performance in FY15
Following the reduction in GST on tractor sales to 10 percent in the budget FY15, tractor sales was slated to grow in the current year. The government had also set an agriculture growth target of 3.3 percent, leading to a positive spillover on tractor sales. Planned loans for tractors were also increased this fiscal year; from 10,000 in FY14 to 12,000 units in FY15 whereas the imposition of duty on import of completely built tractors have also augmented the sale of locally manufactured tractors.
Consequently, MTL's sales volume during 9MFY15 rose to 19,967 units as compared to 14,857 tractors in the corresponding period of last financial year, a growth of 34.4 percent. However, the firm says that low prices of cash crops, power shortage and less than expected government support to the agricultural sector may keep tractor sales from taking off in the current fiscal year.
However, the company has still been able to improve its margins drastically thanks to cost cutting measures and stabilising raw material prices. The company was debt free at the end of last fiscal year, which has led to sharp falls in finance cost in the fiscal year to date, whereas its other income has increased considerably on account of dividends received from associated companies and likely gains on sale of short term investments.
Future outlook
MTL has been in discussion with its principals (AGCO) to restructure their business relationship in view of emerging opportunities of international growth. As of December 2014, it had received 12 months notice from AGCO/MF of their intent to withdraw their Trade Mark, which is perhaps why MTL's stock had started slipping mid February onwards. However, as per latest updates, MTL is still in negotiations with its Principals for access to export market to avail potential demand of Millat Brand Tractors while trying to retain the Massey Ferguson Trade Mark.
If and when the negotiations are successful, it could turn out to a boon for company. On other hand, much uncertainty surrounds the upcoming budget FY16. If the government tweaks the GST upwards again, then the company alongside the industry will take a hit. However, if the government increases its focus on agricultural loans and specifically tractor loans, then it would be prove to be another positive trigger for the company.

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Millat Tractor Ltd - Financial Highlights

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Rs (mn)                          9MFY15         YoY 3QFY15         YoY

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Net sales                        15,909         37%  5,742        124%

Gross profit                      3,054         49%  1,098        189%

Gross margin                        19%  up 160 bps    19%  up 430 bps

Distribution & marketing expense    374         11%    117         26%

Administrative expenses             294          9%    105         20%

Operating profit                  2,387         65%    875        339%

Other operating income              366         53%     92        282%

Other operating expenses            199         84%     79        624%

Finance cost                          7        -90%      3        -74%

PBT                               2,547         69%    887        338%

NPAT                              1,786         73%    608        331%

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