Al-Ghazi Tractors Limited (AGTL) engaged in 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-Ghazi Tractors was established in 1983, and is headquartered in Karachi. It is a subsidiary of Al-Futtaim Industries Company LLC. The company has completed its expansion plan 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 has become country's largest tractor manufacturer.
The government of Pakistan 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 due to rise 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, government deregulated the selling prices of tractors. Now, the 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 prices will improve the profitability of the company.
RECENT RESULTS 3Q'08
Al-Ghazi Tractors posted a pre-tax profit of Rs. 1.437 billion during this period compared with Rs. 1.414 billion during the same period last year (SPLY). 20,003 tractors were produced during this period as against 19,312 produced during the SPLY, while 19,996 tractors were delivered during this period compared with 19,248 during the SPLY. Although, the economic variables were negative for the automobile sector, the tractor sector with its demand backlog continued to maintain its profitability.
The sales increased by 18.48% to Rs.7.87 billion, while the COGS increased by 20%. The gross margin declined to 17.1% for 9M08 from 18.245 for the corresponding period last year, while the net margin declined to 12.2% in 9M08 from 14.2% for the corresponding period last year. The increases in costs were inevitable keeping in view the inflation factor. Al-Ghazi Tractors posted an EPS of Rs. 22.44, an improvement from an EPS of Rs. 22.02 for 9M07.
The government's intention to increase use of tractors through subsidies, if realised, will lead to strengthen the demand, and maintenance of profitability by the tractor companies. As it is, the tractor companies have a backlog of orders, which allow them to keep advance payments while earning handsome interest payments on them.
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 FY07, with 26,364 tractors delivered compared with 26,250 in FY06, bringing the total sales for the year to Rs 9.08 billion compared with 9.02 billion in the same period last year.
The company earned a pre-tax profit of Rs 1.914 billion compared with 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 of tractors owing to better performance of the economy, better crop yield and overall improvement in the buying power of the farmers are all contributing factors 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 agricultural development bank 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 the 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, which 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 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.
AGTL does not have any long-term loans, therefore, its long-term debt-to-equity ratio is negligible. All the 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 carry no 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 that 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 as 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, 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 dividends payout.
FUTURE OUTLOOK
Overall, the company has performed well for the last 3-4 years and has been able to capture a significant market share of around 53%. Recently two new models of tractors were launched signifying continuous growth and expansion on part of the company. The disbursement of loans in the agri sector by ZTBL has reduced significantly, thus leading to lower bookings in FY07.
The decision to deregulate the prices in Budget 07-08 has fared well for the company's financials, as reflected on the company's accounts. The government had imposed 1% Special Excise Duty on sale of tractors effective 1st July 2007. This was subsequently withdrawn; however an anomaly was created whereby local components being procured from local vendors continue to attract 1% Special Excise Duty. If this too is not withdrawn then it will create an additional burden on the company's production costs and will eventually be passed on to the customers.
The revival of Green Tractor scheme may lead to higher sales for the sector, as the scheme provides a 0.1 million subsidy to the tractor buyers. But already the company is overbooked with the farmers having to wait for their delivery.
Although the import of tractors is allowed duty-free, and the Tariff Based System affects the company's costs, the de-regulation of prices negates the impact of all the decisions taken earlier that impacted the industry adversely.
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AL-GHAZI TRACTORS LIMITED-KEY FINANCIAL DATA
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Income Statement (Rs.'000) FY'04 FY'05 FY'06 FY '07
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Sales 6,735,195 7,739,322 9,022,515 9,081,310
Cost of goods sold -5,136,710 -6,136,774 -7,387,468 -7,427,824
Distribution cost -53,328 -61,403 -65,152 -67,145
Administrative expenses -68,427 -79,744 -80,043 -85,845
Operating Profit (EBIT) 1,490,434 1,643,073 1,912,941 1,917,466
Financial Charges -6,245 -7,517 -2,761 -3,012
Net Income Before Taxes 1,484,189 1,635,556 1,910,180 1,914,454
Net Income After Taxes 964,785 1,060,873 1,229,318 1,267,410
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Balance Sheet (Rs.'000) FY'04 FY'05 FY'06 FY '07
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Stores & Spares 8,847 15,316 8,118 10,442
Stock in Trade 647,986 740,140 731,002 708,733
Cash & Bank Balances 2,050,184 5,017,307 5,142,121 4,384,551
Total Current Assets 4,059,887 7,056,152 7,025,286 6,581,042
Property, Plant & Equipment 84,911 158,513 252,243 244,928
Total Assets 4,180,152 7,245,461 7,278,389 6,827,308
Total Current Liabilities 1,545,098 4,155,274 3,698,853 2,938,224
Total Liabilities 3,274,872 3,274,873 3,274,874 3,274,875
Paid Up Capital 195,165 214,682 214,682 214,682
Total Equity 2,616,088 3,071,949 3,549,880 3,851,221
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LIQUIDITY RATIO FY'04 FY'05 FY'06 FY '07
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Current Ratio 2.63 1.70 1.90 2.24
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ASSET MANAGEMENT FY'04 FY'05 FY'06 FY '07
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Inventory Turnover(Days) 35.11 30.14 34.38 28.51
Day Sales Outstanding (Days) 0.41 0.28 0.28 0.96
Operating Cycle (Days) 35.51 30.42 34.67 29.47
Total Asset turnover 1.61 1.25 1.06 1.33
Sales/Equity 2.57 2.94 2.18 2.36
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DEBT MANAGEMENT FY'04 FY'05 FY'06 FY '07
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Debt to Asset(%) 37.42 57.60 51.23 43.59
Debt/Equity (Times) 0.60 1.36 1.05 0.77
Times Interest Earned (Times) 238.66 692.84 218.58 636.61
Long Term Debt to Equity(%) 0.72 0.59 0.84 0.98
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PROFITABILITY (%) FY'04 FY'05 FY'06 FY '07
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Gross Profit Margin 23.73 18.12 20.71 18.21
Net Profit Margin 14.32 13.63 13.71 13.96
Return on Asset 23.08 16.97 14.58 18.56
Return on Common Equity 36.88 40.02 29.88 32.91
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PER SHARE FY'04 FY'05 FY'06 FY '07
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Earning per share 22.47 24.71 28.63 29.52
Price earning ratio 6.94 7.97 7.50 8.52
Dividend per share 15.00 17.50 17.50 17.50
Book value 134.04 143.09 165.36 179.39
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