Beginning its journey in 1983, Al-Ghazi Tractors Limited (PSX: AGTL) has become a household name in tractors and agricultural implements. It forms one half of the national tractor duopoly alongside Millat Tractors, with a market capitalisation north of Rs 25.5 billion. The firm's holding company is the Al-Futtaim Group in Dubai, which owns over 50 percent of the company, Al-Futtaim operates through more than 200 companies across sectors as diverse as commerce, industry and services, and employs in excess of 42,000 people in the GCC and Greater Middle East to encompass Africa, South East and North Asia, Australasia and Europe. 43 percent of Al-Ghazi Tractor's shareholding is in the hands of Case New Holland - a world leader in agricultural and construction equipment.
Al-Ghazi's core business of tractors makes up over 90 percent of its revenues. However, the company is also involved in the production of generators and various agricultural implements such as cultivators, ploughs, sprayers, etc. It has 86 main dealers, 48 parts dealers, and around 2000 workshops spread across the country. The company holds the honour of being the first automobile company in Pakistan to earn the ISO-9000 certification.
Stock Analysis
Al-Ghazi Tractors stock has largely underperformed the KSE100 as well as the BR Automobile Assembler Index over the last fiscal year. This is no surprise; FY16 has been the worst year for the tractor industry in recent memory, in terms of both sales and production.
The stock spiked initially on expectations of the Punjab and Sindh Tractor Schemes - not to mention announcements of handsome dividends at the quarterly earnings - but fell over time as the delay in implementation of the scheme kept dragging on. This had a majorly negative impact on tractor sales. Moreover, the company has been unable to match the record-high cash dividends it disbursed last year.
Perhaps it was the Kissan Package and its after-effects that brought the stock back to life in October, but towards the end of November, the stock tanked once again as it became clear that the tractor schemes would not be implemented. Since then, the stock has been down, and a slight recovery has been on its way since the Auto Policy was announced in March.
Prior Performance
One of the main determinants of the tractor industry's performance is the sales tax on tractors that is whimsically changed each year, creating a cycle of boom and bust. In 2011, the government of Pakistan levied GST of 17 percent on tractor sales. This was brought down to 5 percent in the following year. It was brought up to 10 percent in 2013 and again to 17 percent in 2014, where it stayed for 2015 as well. Al-Ghazi's sales demonstrate this trend quite aptly.
Nevertheless, the company's top line blossomed by 7 percent year-on-year. Profits, both gross and net, were exceptionally high, increasing by 10 percent and 50 percent year-on-year, respectively. All these positives were due to the higher tractor sales - 8 percent more than the year ago.
The higher sales took place in the first half of the year; the first and second quarters of 2015 saw Al-Ghazi's tractor sales spike by a phenomenal 172 percent and 54 percent, respectively. This could be attributed to the enormous decline in interest rates seen in 2015. However, in the latter half of the year, the provincial tractor schemes were announced, which resulted in a staggering 48 percent drop in sales over the comparable period. Nevertheless, Al-Ghazi's performance in the first half of the year still managed to offset the decline in the latter half - a fact worth commending.
Recent Performance
For the first quarter of the calendar year 2016, the misery from the previous two quarters continued; Al-Ghazi's sales dropped by 18 percent year-on-year while the bottom line fell by 24 percent. However, 'lean management and rigorous cost discipline,' as per the company's Director's Report, kept the cost of sales low and gross margins ended up expanding by 100 bps.
To make matters worse, the firm's other income had declined by 64 percent year-on-year. Other income mainly represents the income from investments in mutual funds and bank deposits. It stood at 5 percent of revenue in 2015 as compared to 2.6 percent in 2010. However, the recent quarter shows this figure at 1.8 percent.
The year was marred by low commodity prices and reduced purchasing power of the farmers. In addition, the non-implementation of the tractor schemes meant that potential buyers kept lying in wait.
During the new year, Al-Ghazi re-launched its eponymous lube-oil brand as a way of expanding its horizons. It also participated in the subsidised implements scheme for farmers' community announced by the government of Punjab.
Outlook
As of the new fiscal year, the sales tax on tractors has been reduced to 5 percent. This should help rejuvenate the industry. Moreover, no new tractor schemes have been announced to create any distortions in demand. Unfortunately, there still isn't much positive news regarding the commodity prices, which have left the farmers largely cash-strapped.
As for Al-Ghazi, the company in late March signed an MoU with Al Baraka Bank recently to avail Shariah-compliant options for financing, with quicker processing and flexible payment options. This should help it increase its market share over the competition. Moreover, the new launch of the lube oil is also a step in the right direction, as it expands the company's product line and establishes a much-needed source of non-tractor revenue.
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