Al-Ghazi Tractors Limited (PSX: AGTL) was incorporated in Pakistan as a public limited company in June, 1983. AGTL is a subsidiary of Al-Futtaim Group of Dubai. The company is engaged in the business of providing agricultural solutions by manufacturing and selling tractors, generators, implements and spare parts. Its operational hub is located in Dera Ghazi Khan which has technical collaboration with Case New Holland (CNH), the largest manufacturer of agricultural tractors in the world.
Pattern of Shareholding
As of December 31, 2023, AGTL has 57.964 million shares outstanding shares which are held 2475 shareholders. Associated companies, undertakings and related parties which include Al-Futtaim Industries Company (LLC) and CNH Industrial N.V. hold 50.02 and 43.17 percent shares of AGTL respectively. These are followed by local general public accounting for 4.68 percent shares of the company. The remaining shares are held by other categories of shareholders.
Historical Performance (2019-2023)
During the period under consideration, AGTL’s topline slid in 2019 and 2020 followed by significant year-on-year growth in the following years. Conversely, its bottomline declined in 2019 and 2022. The company’s margins which drastically fell in 2019 recorded a staggering rebound in 2020. In 2021, gross margin slightly fell while operating and net margins continued to expand notably. In 2022, AGTL’s margins considerably plunged followed by 2023 where gross and net margins picked up to some extent while net margin ticked down a little. The detailed performance review of the period under consideration is given below.
In 2019, AGTL sold 15,719 tractors which were 34 percent less than what it sold in 2018 (see the graph of sales volume and sales revenue). This resulted in 27.77 percent year-on-year drop in the net sales revenue of the company in 2019. Low sales volume was attributable to persistent economic slowdown coupled with worsening water crisis which affected farmers’ economic health. Moreover depreciation of Pak Rupee, heightened prices of raw materials and high conversion cost culminated into higher pricing rendering AGTL;s products unaffordable for the farmer community in the absence of any significant support scheme by the government. Low off-take coupled with high cost of production took its toll on the margins of the company whereby the GP margin clocked in at 18.19 percent as against GP margin of 24.1 percent recorded in 2018. In absolute terms, gross profit dwindled by 45.56 percent in 2019. Distribution and administrative expenses dropped by 4.7 percent and 2.84 percent respectively in 2019 due to lower plant operations and curtailed sales volume. The company also undertook lesser advertisement and sales promotion activities in 2019. Other income dipped by 0.77 percent in 2019 due to lower return on bank deposits. While the company booked considerably lesser provisioning for WWF and WPPF, elevated provisioning for slow moving and obsolete inventories resulted in 4.86 percent uptick in other expense in 2019. AGTL recorded 54.75 percent year-on-year slump in its operating profit in 2019. OP margin dipped to 12.5 percent in 2019 vis-à-vis OP margin of 19.93 percent posted in the previous year. Finance cost gave another major blow to the bottomline as it surged by 217.33 percent in 2019 owing to high interest rate and increased bank borrowings. AGTL increased the utilization of overdraft facilities during the year to sustain its operational activities amidst low sales and depressed liquidity. The bottomline nosedived by a massive 60.14 percent year-on-year in 2019 to clock in at Rs.977.652 million with EPS of Rs. 16.87 versus EPS of Rs. 42.31 percent recorded in 2019. NP margin also nosedived from 12.66 percent in 2018 to 6.99 percent in 2019.
While the company was still grieving over its performance in 2019, the global pandemic hit in 2020, further crippling the economy. The topline further shrank by 14.7 percent year-on-year as AGTL could only sell 12,142 tractors during the year which was 22.7 percent lesser than the sales volume recorded in 2019. This was the consequence of economic downturn amidst COVID-19 coupled with low purchasing power of the farmer community. AGTL increased the prices of its tractors to absorb the cost shocks. This resulted in 8.7 percent uptick in AGTL’s gross profit in 2020 with its GP margin of recovering from the trough it saw in 2019 to clock in at 23.18 percent. Lower sales volume helped the company record 15.93 percent year-on-year plunge in its distribution expense in 2020. Conversely, administrative expense grew by 8.73 percent in 2020 due to inflationary pressure. This was despite the fact that AGTL streamlined its workforce from 436 employees in 2019 to 402 employees in 2020. Other income declined by 4.27 percent in 2020 due to lower scrap sales. Other expense also tapered off by 30.80 percent in 2020 due to lower provisioning done for WWF, WPPF and obsolete and slow moving inventory. AGTL’s operating profit strengthened by 18.7 percent in 2020 while its OP margin climbed up to 17.37 percent. The company overcame the liquidity crunch it experienced in the previous year through efficient equity management. This coupled with low discount rate reduced the finance cost for the company by 63.41 percent in 2020 and helped the bottomline grow by 38 percent year-on-year to clock in at Rs.1349.657 million with EPS of Rs.23.28 and NP margin of 11.31 percent.
2021 proved to be a buoyant for AGTL where its sales volume grew by a whopping 49.5 percent year-on-year to clock in at 18,156 units. This resulted in 72.42 percent higher net sales in 2021 than that recorded in the last year. There are multiple factors behind this jaw-dropping growth in topline. Firstly, the economy was showing the signs of recovery post pandemic. Secondly, the farmers had enough liquidity available due to government support initiatives. Moreover, satisfactory water availability also resulted in encouraging performance of the agriculture sector which created a ripple effect for the related industries such as tractors, fertilizers etc. High sales volumes and better pricing couldn’t fully offset the high cost of sales and GP margin for the year dipped slightly to clock in at 22.94 percent. In absolute terms, gross profit picked up by 70.69 percent in 2021. The company was able to contain its distribution cost by 45.64 percent in 2021 despite high sales. This was due to considerably lower warranty expense and freight charge reversal of Rs.10.945 million in 2021 versus freight expense of Rs.61.417 million in 2020. Administrative expense surged by 9.66 percent in 2021. This was due to higher fee & subscription charges as well as elevated legal & professional charges incurred during the year which offset the impact of lower payroll expense. AGTL further cut down its workforce to 393 employees in 2021. Another positive development during the year was 148.40 percent year-on-year rise in other income which came on the back of higher return on deposit and other accounts as well as scrap sales. Other expense inched up by 3.77 percent in 2021 due to considerably higher profit related provisioning, the impact of which was partially offset by reversal booked on slow moving and obsolete inventory. AGTL’s operating profit enhanced by 101.5 percent in 2021. OP margin also significantly improved in 2021 to stand at 20.30 percent. Finance cost dropped by 94 percent year-on-year in 2021 owing to low discount rate. The company believed that the financial cost would have dropped further, had the authorities released the sales tax refund amounting to Rs. 2.99 billion which was creating liquidity crunch for the company and compelling it to knock the doors of external creditors. Net profit grew by 119.16 percent to clock in at Rs.2957.862 million in 2021 with EPS of Rs.51.03 and NP margin of 14.37 percent.
AGTL’s topline continued to impress in 2022 with its market shares clocking in at 45 percent versus market share of 32 percent in 2021. With the sale of 19,929 tractors which was 9.77 percent up than the sales volume recorded in 2021, the topline of AGTL grew by 37 percent year-on-year in 2022. This was despite the fact that the agricultural sector was under extreme stress during the year due to severe floods in the 2HCY22. Currency depreciation, high prices of raw material, elevated indigenous inflation and energy tariff resulted in 45.93 percent spike in cost of sales in 2022. This resulted in a paltry 7.21 percent uptick in gross profit in 2022. GP margin of the company shrank to 17.95 percent in 2022. Massive increase of 167.71 percent in the distribution cost was the result of higher salaries, provision booked against doubtful receivables, advertising & promotion expense and warranty expense incurred during the year. Administrative expense also escalated by 51.68 percent in 2022 primarily due to elevated payroll expense despite the fact that number of employees stood intact at 393. Other income expanded by 26.4 percent in 2022 due to higher income on bank deposits as well as scrap sales made during the year. The impact of other income was conveniently offset by 61.17 percent higher other expense recorded in 2022. This was due to provision booked for slow moving and obsolete inventory in 2022. AGTL recorded 3.29 percent downtick in its operating profit in 2022 with OP margin falling down to 14.33 percent. Finance cost also jolted AGTL’s bottomline in 2022 not only because of several hikes in the discount rate but also because of increase in short-term borrowings. AGTL’s recorded finance cost of Rs.245.035 million in 2022 which was 2699.12 percent higher than the finance cost recorded in 2021. The imposition of super tax was another whammy for AGTL’s bottomline which shrank by 27.11 percent year-on-year to clock in at Rs.2156.044 million in 2022 with EPS of Rs.37.2 and NP margin of 7.65 percent.
In 2023, AGTL’s net sales grew by 22.49 percent. The company’s sales volume stood at 15,420 units, down 22.63 percent year-on-year which indicates that the topline growth was due to upward price revision. High level of political and economic instability not only took its toll on the purchasing power of consumers but also halted the production activities of the companies due to intermittent restrictions on the import of essential raw materials and machinery. The company’s market share fell to 36 percent in 2023. Cost of sales grew by 21.52 percent in 2023, however, with price escalation; AGTL was able to record 26.9 percent higher gross profit in 2023 with GP margin jumping up to 18.59 percent. Distribution expense mounted by 32.98 percent in 2023 due to higher salaries expense, advertising and promotion, freight and after sales expenses incurred during the year. 101.30 percent higher administrative expense incurred during the year was the result of elevated payroll expense, depreciation expense, vehicle running & maintenance charges, fee & subscription charges specifically paid for cloud & related services as well as transformation & consultancy charges paid for quality & standards improvement. During the year, the company also increased its headcount to 410 employees. Other income magnified by 203.39 percent in 2023 particularly due to higher return on bank deposits. Other expense soared by 24.43 percent in 2023 due to higher provisioning for WWF, WPPF and slow moving and obsolete inventory. AGTL recorded 24.81 percent higher operating profit in 2023 with OP margin slightly ticking up to clock in at 14.6 percent. Finance cost enlarged by 45.45 percent in 2023 due to higher discount rate. Net profit improved by 21.14 percent to clock in at Rs.2611.772 million in 2023 with EPS of Rs.45.06 and NP margin of 7.56 percent.
Recent Performance (1HCY24)
The tractor industry started recovering during 1HCY24 with 16 percent market growth. This was backed by economic stability. AGTL’s topline posted 18.91 percent year-on-year growth in 1HCY24. This was despite the fact that the company sold 6979 units during 1HCY24 versus sales volume of 7108 units recorded during the same period last year. 58.11 percent improvement in gross profit in 1HCY24 with GP margin clocking in 22.46 percent versus GP margin of 16.89 percent recorded during the same period last year evidently shows that the company was able to increase its prices significantly to absorb the cost inflation. Distribution expense increased by 10.65 percent during 1HCY24. The main components of distribution expense are freight charges, salaries expense, after sales expense as well as advertising & promotion expense. Administrative expense also spiked by 75.24 percent during the period on account of payroll expense, SAP license fee and transformation charges to enhance operational efficiency. Other income slid by 31.35 percent during 1HCY24 due to lower return on bank deposits on account of monetary easing. 36.95 percent escalation in other expense during the period is possibly the impact of higher provisioning done for WWF, WPPF as well as slow moving and obsolete inventory. AGTL recorded 46.24 percent stronger operating profit in 1HCY24 with OP margin of 17.1 percent versus OP margin of 13.89 percent recorded during the same period last year. Finance cost declined by 58.84 percent in 1HCY24 due to a downtick in discount rate and improved liquidity position. AGTL recorded 116 percent growth in its net profit in 1HCY24 which clocked in at Rs.1733.247 million with EPS of Rs.29.9 versus EPS of Rs.13.84 recorded during the same period last year. NP margin also greatly enhanced from 5.44 percent in 1HCY23 to 9.88 percent in 1HCY24.
Future Outlook
Near-term stabilization in economy and a downtick in discount rate may bode well for the auto industry volumes in the coming months. Low-base effect may also result in growth in financial performance. However, farm economics may not rebound notably due to low maize cultivation and wheat price war. While the tractor industry was exempt from sales tax until June 2024, 10 percent sales tax on tractors has been introduced in the recent budget. This will discourage tractor purchases.
The company is still optimistic on its sales volume on the back of Green tractor scheme announced by the Punjab Government with an allocation of Rs. billion to subsidize the purchase of tractors for Kissan card holders.