At present, there are two tractor companies in the country, which are involved in manufacturing of indigenized tractors. Millat Tractors Limited produces Massey Ferguson tractors under franchise from AGCO and Al-Ghazi Tractors Limited is an entity of UAE-based Group Al-Futtaim who acquired the company under the privatization process in 1992 and manufacturing Fiat New Holland tractors.
The production capacity of each company is 15,000 tractors per annum. Both the companies had failed to meet the supply against increasing demand and the limited capacity of production resulted into abnormal delay in deliveries to the farmers. Both the companies could deliver 49,500 units against the demand of 77,261 units in 2007.
Millat Tractors Limited (MTL) was established in 1964 to introduce and market Massey Ferguson (MF) Tractors in Pakistan. An assembly plant was setup in 1967 to assemble tractors in semi-knocked down (SKD) condition. The company was nationalized under the Economic Reforms Order in 1972 and started assembling and marketing tractors on behalf of Pakistan Tractor Corporation (PTC), which was formed by the Government for import of tractors in SKD condition. In 1980 the Government decided to produce indigenous tractors and entrusted this task to PTC. In 1981 MTL took over this task. This was the turning point in the company's history and it went about the task methodically and rapidly. Just in one year's time, the company took a giant step towards self-reliance by setting up the first engine assembly plant in Pakistan.
MTL made a strategic decision right in the beginning to bring those manufacturing facilities in-house for which capabilities did not exist in the country and for parts, which required high precision and investment. Therefore, in 1984, sophisticated manufacturing facilities for the machining of intricate components were set up. Currently, critical components like engine blocks, sump, transmission case, axle housing, hydraulic lift cover, front axle support and centre housing are all being machined most successfully in-house at MTL from local sourced castings.
In 1992, the company was privatized. The employees joined hands and took over the management by winning an open bid. To maintain its leadership role in tractor manufacturing in the country, MTL continues to look toward future, to identify and exploit new opportunities and to consolidate existing ones. The Tractor Assembly Plant is part of this philosophy. This plant started its production in 1992. The establishment of this modern plant not only increased production capacity to 16,000 tractors per year on a single shift basis, but also provided a quantum jump to the quality of the assembled tractors and pushed MTL into ranks of the major tractor manufacturing companies of the World. In 1993, MTL also acquired the management control of Bolan Castings Limited (a public limited company specialising in intricate automotive castings) in partnership with employees of the company, in 1993.
Today, Millat Tractors Limited is the leading company that specializes in the manufacturing of tractors, diesel engines, forklift trucks, and a range of other agricultural equipments. Presently, the market share of MTL hovers around 50% in terms of sales. With a present production capacity of 300,000 tractors, the company plans to expand it to 40,000 in the years to come. Capacity utilization, however, exceeds 150%. Machining capacity of major components is being bolstered along with "double shift" operation to come at par with the ever-growing demand. The company has established a new company named Millat Industrial Products (Pvt) Limited to manufacture quality automotive batteries.
CURRENT SCENARIO:
The year 2008-09 saw the world plunged into an acute economic downturn unwinding in 2007. It was perceived as the worst financial crisis since the great depression of the 1930s. Fortunately, for Pakistan, the impact of financial crisis has not been as severe as it has been for other countries in the region. Part of this can be explained by lack of interdependence on global economies by virtue of limited exports (only around 8% of GDP) and lower FDI.
Tractor is the only automobile sector that has shown sustained growth even during the recession in the past two years and has always faced foreign competition. The main reason for the high competitiveness of local tractors is that the models that command 80 percent of the market have local component level of 91 percent. Pakistan produced 53,470 tractors in 2007-08 and the two main tractor manufacturers of the country are on target to roll out 60,000 tractors in this fiscal year. Between July 2008 and March 2009, the industry has produced 42,220 tractors and is set to add another 18,000 units by the end of June this year.
Tractor demand is likely to stabilise at 55,000-60,000 units in the short-term and further growth would come if the agricultural economy continue to grow at a fast pace. Higher productivity coupled with lucrative commodity rates has empowered even farmers with smaller land holding to afford tractor. Tractor industry globally is on decline but the Pakistani tractor industry weathered the recession comfortably.
BUSINESS OVERVIEW:
The year 2008-09 will be remembered in the company's history as the "year of records" as Millat Tractors set a new benchmark by delivering 30,677 tractors, the highest-ever by any company in Pakistan. In fact, praise to the strenuous efforts and hard work of the employees, vendors and dealers, the company broke its own standards of the previous year of 27,260 units thus registering an increase of 12.5%. The overall market leadership, hence, was fully maintained by Millat Tractors, which remained the front runner by selling 30,677 units out of the total industry sale of 61,150 tractors. As a result, Millat Tractors was able to provide the much-needed life-line to the national economy by saving huge foreign exchange, amounting to Rs 21,619 million against Rs 19,790 million of previous year on account of locally developed components of tractors.
At present MTL manufactures seven different models of tractors suitable for all agro-climatic conditions, size of farms and within reach of farmers of different segments. Presently, MTL has the highest deletion level of 90% and 55% in low engine and high engine capacity tractors respectively. The lower deletion level in high engine capacity tractors still makes it susceptible to exchange rate fluctuations. In the wake of appreciation, the company is therefore at a greater advantage and vice versa.
RECENT FINANCIAL RESULTS:
Millat Tractors recorded sales of Rs 16.0 billion for the year 2008-09 as compared to Rs 11.2 billion for the year 2007-08, thus an increase of 42.8 % in sales value over last year. Revenue for the company is mainly quantity-driven rather than price-driven, since the GoP has frozen the prices of locally produced tractors. In addition to this, changing economic scenario such as credit financing, interest rates, crop yield, support prices, along with unpredictable climatic conditions always pose a risk to the demand of tractors consequently influencing the company's sales volume. This is why the sales trend of MTL has been erratic.
Liquidity position of the company can be seen as erratic over the time period. The company's figures are near about the industry averages. FY09 witnessed a decline in both Current Assets and Current Liabilities of 9% and 21% respectively. The current ratio went up by 14% in the current year. Gross profit ratio has been improved to 15.1 % comparing with the 13.1 % of the last year. The pre-tax profit was Rs 1,752 million against Rs 1,120 million of last year, reflecting an increase of 56.4%. The after tax profit was also increased by 50% from Rs 810 million of previous year to 1,215 million this year.
The administration, general and selling expenses increased to Rs 653 from Rs 572 million of last year due to increase in sales volumes and other inflationary trend prevailing during the year. Other income decreased to Rs 199 million from Rs 322 million of the last year. Return on capital employed was 36.30% as against 27.24% of the last year.
With major imports of CKD kits coming from UK, the gross profit of the company is directly related to the Pound Sterling to Rupee price movement and leaves the company susceptible to changes in exchange rate. Furthermore, fluctuations in international steel prices also impinge on the company's gross profit ratio as evident from its irregular trend. While the top line remained on the mercy of changing prices, the bottom line kept on strengthening on account of high bank returns. Since the deletion level of MTL is relatively lower in high engine capacity tractors, it is quite vulnerable to fickle exchange rate. While the appreciation of PKR against Pound has proved to be beneficial in terms of cost of manufacturing; depreciation of rupee, on the other hand, has negatively affected the profit margins by increasing the cost excessively.
Owing to increase in demand for tractors and related agro-implements, inventory of the company increased exorbitantly. Thus, inventory turnover has been historically higher than the industry average. As a result, the operating cycle of MTL has also lengthened over the years under discussion. However, one can see a reversal in the trend in FY07 with the ITO reducing to the industry level thus bringing the overall operating cycle in line with the industry trend. This improvement can be mainly attributed to the contracts for supply of spare parts of Millat Generating Sets and Forklift Trucks to institutions. The same trend continued in the following years. This is encouraging given the depressing financial recession that had plagued the economy and posed to penetrate in this sector.
After a decline over FY08 the total asset turnover and sales/equity picked up impressively in FY09 climbing to 2.35 times and 4.72 times respectively. Total assets grew by 9% as against 41.5% growth in sales indicating a productive and resourceful use of the assets of the company. In FY06 and FY07, high advances from customers coupled with amount received from customers for warranty and maintenance services consequently increased the total debt of the company as evident from high debt-equity and debt-asset ratios. Long-term debt of the company, which was near to the ground initially, has shown an upward march, showing MTL's increased reliance on long-term loans, thus poses a threat in terms of interest rate risk.
In FY09 the Company successfully raised Rs 46 million through the issue of one for four bonuses issue, which helped largely in managing debt coverage. The burgeoning general reserves and higher shareholder funds as lowered the company's Debt to Equity Ratio. However, as evident, increased interest rates took its toll on the profitability of the company as the TIP ratio illustrates a decline over the period.
The interest coverage ability (TIE Ratio) of the company is fairly high till FY06 mainly due to lower finance expenses owing to higher customer deposits, greater financial controls and borrowings at a lower rate. However, the TIE ratio plummeted in FY07 where declining EBIT was unable to cover exorbitantly high finance cost. EPS is in line with the Profit margins of the company. Since MTL imports CKD kits from UK, higher EPS was recorded when Rupee was strong against Pound Sterling along with low steel prices in the international price making imports cheaper. On the contrary, a sharp dip was observed in FY06 owing to strong pound sterling against rupee as well as due to rise in material cost. Overall, the company fared well in terms of its EPS. This trend continued to strengthen over the period and climbed to Rs 51.87 in FY09.
DPS has risen over the years while remaining below the industry average till FY06. BV per share however declined over the 4 years, as the number of outstanding shares increased. In FY09 the break-up value of a share increased to Rs 143.88 per share from Rs 129.71 of previous year.
FUTURE OUTLOOK:
High price of oil in the international market is creating inflationary pressure in the economy. As a result, the cost of borrowing has become higher than the preceding years. This coupled with worldwide shortage of steel is gradually rendering the company inefficient in terms of manufacturing cost. Furthermore, the GoP has regulated the prices of tractors. This coupled with lower deletion level for new entrant is creating an uneven playing field. However, the proposal to allow local assemblers to increase the price of agricultural tractors is under consideration. This will provide a breather to the company and will consequently augment the company revenue.
At Millat Tractors development of new products through innovation and diversification remain in focus for continued growth and progress. Millat Tractors will continue to explore and tap all available opportunities, shall readily accept challenges and will continue to make course corrections wherever necessary for the betterment of the company and the country.
As a result of various measures taken by the company to meet the growing demand, the company's tractors supply position will improve further in the coming years. This would not only support the farming community in getting prompt tractor deliveries but will also fetch more business for the company. The support of the government to the agriculture sector in terms of support prices to the local farmers provides greater opportunities for MTL. This enhanced income available to the farmers will not only enable them to buy agricultural inputs, but also educate themselves to modern agricultural practices to improve productivity, which is low compared to international standards. The government policy to encourage corporate farming will also create a demand for the company's products, which could also include higher horsepower range of tractors and implements.
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TRADING RESULTS 2009 2008 2007 2006 2005 2004
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Sales - Net 15,910,619 11,174,014 10,961,438 9,737,382 8,326,231 6,984,922
Gross profit 2,409,120 1,472,716 1,128,585 1,292,838 927,359 847,336
Operating profit 1,755,736 901,101 599,022 938,960 712,651 619,805
Profit before tax 1,752,332 1,120,139 840,202 1,074,597 700,198 595,342
Net profit after tax 1,215,120 810,458 636,897 730,577 453,862 394,622
Share capital 234,275 187,420 187,420 156,183 120,141 80,094
Reserves 2,220,776 2,211,000 1,986,000 1,600,000 1,362,000 1,111,500
Operating fixed assets 405,618 298,219 369,443 279,210 238,783 240,587
Non current assets 698,025 789,996 560,741 542,852 236,056 76,137
Net work capital 2,350,225 2,033,577 L853775 1,814,425 1,683,448 1,152,208
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Long term liabilities
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Deferred liabilities 83,055 82,913 77,379 243,344 183,157 20,384
Sales growth 42.38 1.94 12.57 16.95 19.20 32.77
Gross profit growth 63.8 30.49 (12.70) 39.41 9.44 29.87
Pre tax profit growth 56.43 .33.33 (21.81) 53.47 17.61 45.17
Net profit after tax growth 49.93 27.26 (12.82) 60.90 15.01 48.57
Gross profit ratio 15.14 13.16 10.30 13.28 11.14 12.13
Operating profit ratio 11.03 8.06 5.46 9.64 8.56 8.87
Profit before tax ratio 11.01 10.03 7.66 11.04 8.41 8.52
Profit after tax ratio % 7.64 7.25 5.81 7.50 5.45 5.65
Return on capital employed % 36.30 27.24 24.27 31.34 23.44 25.91
Inventory turnover Times 6.98 5.39 4.68 3.67 3.92 5.42
Total Assets Turnover ratio Times 2.35 1.5.4 1.75 1.31 1.32 2.0
Fixed asset turnover Times 31.20 23.37 30.50 34.87 34.85 30.7
Return on assets % 25.83 15.41 13.41 14.42 11.07 16.76
Long term debt Equity ratio 0:100 O;100 0:100 0:100 0:100 0:100
Current ratio 1:7:1 1.5:1 1.6:1 1.4:1 1.4:1 1.6:1
Financial charges coverage Times 46.28 57.43 58.96 661.48 430.30 69.1
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Pay out
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Dividend Rs per share Rs 4500 3250 2200 2000 1500 1300
Bonus 25 25 - 20 30 50
Payout ratio (after tax) 91.57 81.00 65.00 47.00 48.00 37.00
Earning per share (after tax) 51.87 34.59 33.98 38.98 37.78 32.85
Price earning ratio 5.38 6.15 9.75 8.26 5.50 8.52
Break-up value Rs. 143 88 162 14 14388 153.24 16440 18830
Earning before interest, tax, 1 841,478 1,174,111 884,393 1,106,187 736,901 635,506
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Depreciation and amortization
(EBITDA)
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EBITDA Margin 11.57 10.51 8.07 11.36 8.85 9.10
Return on equity % 36.05 26.67 23;69 30.52 22.90 25.48
Quick / Acid Test ratio 1 08! 1 09 1 1 07 1 0 90 1 084 1 0 87 1
Dividend Yield 21.30 10.91 6.75 6.89 5.30 5.70
Dividend Cover 1.09 1.33 1.54 2.34 2.51 3.79
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(Times) PAT/Dividend
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Market price - year end Rs. 279.24 266.00 331.50 322.00 208.00 280.00
Market price-high Rs. 302.00 347.00 378.00 390.00 365.00 299.00
Market price - low Rs. 12054 25000 27400 19000 20000 155.00
Market price - average Rs. 211.27 298.00 326.00 290.00 282.50 227.00
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