Millat Tractors Limited (PSX: MTL) is a public limited company incorporated in Pakistan in 1964. MTL is engaged in the manufacturing and sale of internationally acclaimed tractors, diesel-generating sets and prime movers, diesel engines, and forklift trucks.MTL is also involved in the sale, implementation, and support of Industrial and Financial System (IFS) applications locally and abroad. As of June 30, 2024, the company has an annual capacity of 30,000 tractors per annum on a double-shift basis.
Pattern of Shareholding
As of June 30, 2024, MTL has a total of 191.798 million shares outstanding which are held by 10,003 shareholders. Directors, CEO, their spouses, and minor children have the majority stake of around 57 percent in the company followed by the local general public holding 37.12 percent shares. Associated companies, undertakings, and related parties account for 28.33 percent of shares of MTL. Around 9.26 percent of the company’s shares are held by Insurance companies followed by trusts holding 3.44 percent shares. The foreign public holds 3.32 percent shares of MTL while Banks, DFIs, NBFIs, and Pension funds have 2.02 percent shares. The remaining ownership is distributed among other categories of shareholders.
Historical Performance (2019-2024)
MTL’s topline tells a mixed tale of ups and downs over the period under consideration. While it plunged in 2019 and 2020, it rebounded for the next two years, only to nosedive again in 2023. In 2024, MTL’s topline registered a staggering growth. Conversely, MTL’s bottom line posted year-on-year growth only in 2021 and 2024 among all the years under consideration. Its margins which were waning until 2020 revived in 2021 and then slipped again in 2022. In 2023, while gross margin inched up, operating and net margins continued their downhill journey. In 2024, all the margins posted considerable growth (see the graph of profitability ratios). The detailed performance review of the period under consideration is given below.
2019 was a rough year for the tractor industry as it posted a decline in output and off-take after years of excellent performance. Industry-wide sales clocked in at 50,000 units as against a sales volume of 70,000 units in 2018. The retarded sales volumes were led by diminishing agricultural growth on account of water shortage as well as low demand for sugar-cane crops as support price wasn’t actively managed. Besides, the wheat crop was damaged by heavy downpours in Southern Punjab. Succumbing to the industry-wide downturn, MTL’s sales volume dropped by 25 percent year-on-year to clock in at 32,019 units in 2019. This culminated in a 19.14 percent year-on-year drop in its topline. However, the market share of the company improved from 61 percent in 2018 to 64 percent in 2019. Cost of sales also slid by 16.24 percent in 2019 yet was unable to sustain its gross profit which tapered off by 29.5 percent in 2019. GP margin also dropped from 21.9 percent in 2018 to 19.1 percent in 2019. Lower payroll expenses and trademark fees particularly contributed towards curtailed operating expenses in 2019. Net other income also plunged by 56.59 percent year-on-year in 2019 mainly because of no fair value gain earned on short-term investments in 2019 coupled with a skimpy return on bank deposits and TDRs. Operating profit shrank by 34.15 percent year-on-year in 2019 while OP margin dropped from 20.2 percent in 2018 to 16.46 percent in 2019. Finance costs mounted by 1588.51 percent in 2019. This was because the company obtained increased short-term borrowings during the year. Moreover, the high discount rate also played a due role in pushing up the finance cost. As a consequence, the bottom line took a 31.8 percent year-on-year dive in 2019 to clock in at Rs.3638.05 million with an EPS of Rs.64.9, down from the EPS of Rs.120.43 recorded in 2018. NP margin also receded from 13.85 percent in 2018 to 11.68 percent in 2019.
2020 was another rough year for MTL characterized by the Covid-19 pandemic. Although the agriculture sector performed well and posted year-on-year growth of 2.6 percent in 2020 as against 0.5 percent in 2019, strict lockdowns and discontinuation of routine business activity took a toll on MTL’s sales volume which dipped to 20,707 units in 2020, translating into a year-on-year decline of 35 percent. Consequently, MTL’s topline plummeted by 26.33 percent year-on-year in 2020. While the cost of sales slid due to low capacity utilization of 69 percent recorded in 2020 versus capacity utilization of 107 percent achieved in 2019, per unit cost surged on account of Pak Rupee depreciation. This squeezed the gross profit by 28.6 percent in 2020 with GP margin falling down to 18.51 percent. Operating expenses were in check due to a reduction in the number of employees from 388 in 2019 to 360 in 2020. Lower trademark fees also drove down the operating expenses in 2020. The major blow to the operating performance of MTL came on the back of a massive drop in other income mainly because of low dividend income. The company’s operating profit thinned down by 37.8 percent in 2020 with OP margin sliding down to 13.89 percent. Finance costs continued to bite the bottom line despite a low discount rate towards the end of the year. This was mainly because of the markup paid on short-term borrowings. MTL’s net profit narrowed down by 40.89 percent year-on-year in 2020 to clock in at Rs.2150.55 million with EPS of Rs.38.36 and NP margin of 9.37 percent.
After two ruthless years, MTL’s top line posted an impressive year-on-year growth of 91.58 percent in 2021. This was backed by 71.5 percent growth in volumes translating into an off-take of 35,515 units in 2021. The economy started showing signs of recovery post-pandemic with the agriculture sector growing at the rate of 2.8 percent in 2021. Wheat bumper crop coupled with an increase in minimum support price for various crops by the government resulted in vigorous cash flows and improved liquidity position for the farmers. The company also achieved the highest-ever export sales volume of 2000 tractors in 2021. Due to the favorable exchange rate for the most part of the year, gross profit enhanced by118.37 percent year-on-year in 2021 with GP margin jumping up to 21.09 percent. Carriage and freight charges increased significantly due to export sales. This coupled with the trademark fee paid to Massey Ferguson played a major role in enlarging the distribution cost by 50.51 percent in 2021. The administrative expense also escalated by 29.27 percent in 2021 on account of higher payroll expenses despite the reduction in employee count to 346 in 2021. Other expenses grew by 108.27 percent year-on-year in 2021 on account of increased provisioning done for WWF and WPPF. However, it was offset by a splendid growth of 163 percent in other income by robust dividend income from Millat Equipment Limited, gain on sale of short-term investments, and return on bank deposits and TDRs. This resulted in a staggering 147.48 percent year-on-year rebound in operating profit with OP margin reaching 17.95 percent in 2021. 95.75 percent year-on-year drop in finance cost was due to significantly lesser short-term borrowings during the year coupled with monetary easing. The net profit of MTL was measured at 168.81 percent year-on-year in 2021, clocking in at Rs.5780.93 million with an EPS of Rs.59.68 and an NP margin of 13.15 percent.
In 2022, MTL’s net sales followed the growth trajectory despite the bleak macroeconomic and political backdrop. High energy costs, a rise in the discount rate, and sharp depreciation in currency played tricks on the company’s performance. The off-take marginally reduced by 510 units, however, the top line grew by 21.43 percent on account of an increase in tractor prices. The rise in the cost of raw materials as well as high fuel and power charges wreaked havoc on the company’s cost which squeezed the GP margin to 19.11 percent in 2022. In absolute terms, gross profit grew by 10 percent in 2022. Selling and administrative expense hiked by 8.6 percent and 11.92 percent respectively in 2022 on account of high inflation which drove the payroll expense up despite a reduction in employee count to 334 in 2022. Higher trademark fee was also a key driving force for elevated operating expenses in 2020. MTL recorded net other income of Rs.271.67 million in 2020, up 430.17 percent year-on-year which was the consequence of handsome dividend income. This resulted in a 12.73 percent bigger operating profit recorded in 2022, albeit, the OP margin marched down to 16.66 percent. Finance costs increased by 2354.87 percent in 2022. This came on the back of several hikes in the discount rate. Moreover, the company faced liquidity issues during the year due to non-repayment of sales tax refunds of Rs.5.7 billion by FBR. Hence, the company had to obtain a large amount of short-term borrowings to meet its working capital requirements. Then imposition of super tax increased the average effective tax rate for 2022 to 37.52 percent as against an effective tax rate of 26.63 percent in 2021. As a result, the net profit posted a year-on-year dive of 6.47 percent in 2022 to clock in at Rs. 5407.01 million with NP margin clocking in at 10.13 percent. EPS also sank to Rs.28.19 in 2022.
The devastating floods in the southern region of the country proved to be the worst beginning of 2023. Shrunken pockets of the farmer community squeezed the tractor demand since the beginning of the year. This coupled with the sky-rocketed level of inflation, Pak Rupee depreciation, high discount rate, spiked energy charges, and import restrictions created chaos in the overall automobile industry which is highly import-oriented. MTL produced 19,022 units in 2023 which was 45.3 percent less than the production volume recorded by the company in 2022. This translated into a capacity utilization of 63 percent in 2023 which was even less than the 2020 level. MTL’s topline slid by 17.21 percent year-on-year in 2023, coming on the back of a 47 percent drop in sales volume. Cost of sales inched down by 18.13 percent year-on-year, resulting in a 13.29 percent drop in gross profit in 2023. However, the GP margin rose to 20 percent due to an upward revision in the prices of tractors in 2023 to pass on the impact of cost hikes to the customers. Operating expenses surged by 15 percent year-on-year in 2023 due to higher trademark fees and payroll expenses incurred during the year. MTL booked net other expenses of Rs.319.01 million in 2023 which was due to significantly lower dividend income earned during the year coupled with exchange loss incurred due weaker Pak Rupee. This trimmed down the operating profit by 24.57 percent year-on-year in 2023 with OP margin slipping to 15.18 percent. 496.7 percent higher finance cost incurred in 2023 was the consequence of unparalleled discount rate and considerably higher long-term as well as working capital-related borrowings in 2023. MTL’s bottom line slid by 37.53 percent year-on-year in 2023 to clock in at Rs.3377.64 million with EPS of Rs.17.61 and NP margin of 7.64 percent – the lowest among all the years under consideration.
MTL recorded a phenomenal year-on-year growth of 107.08 percent in its topline in 2024. During the year, the company produced 30479 tractors which resulted in capacity utilization of 102 percent. Dispatches stood at 30,620 units, up 64.43 percent year-on-year. This revival in sales volume came on the back of improved farm economics and robust growth recorded in important crops. The cost of sales mounted by 100.45 percent in 2024. This resulted in a 133.57 percent year-on-year enhancement in gross profit with GP margin attaining its highest level of 22.57 percent in 2024. Selling and distribution expenses escalated by 77.3 percent in 2024 on the back of a massive spike in trademark fees paid to M/s Massey Ferguson Corp, insurance expenses as well as salaries expenses incurred during the year. Administrative expenses surged by 60.07 percent in 2024 which was the result of higher payroll expenses although the number of employees stood largely intact at 335. Other income strengthened by 119.77 percent in 2024 on account of hefty dividends received from Millat Equipment Limited and higher return of bank deposits. However, the impact of other income was completely offset by a 53.64 percent hike in other expenses due to higher profit-related provisioning. MTL recorded 159.17 percent higher operating profit in 2024 with OP margin jumping up to 19 percent. The company was able to cut down its finance cost by 21.28 percent in 2024 by paying off its outstanding liabilities. Net profit picked up by 193.6 percent in 2024 to clock in at Rs.9916.605 million with EPS of Rs.51.7 and NP margin of 10.84 percent.
Future Outlook
The improvement in the tractor demand exhibited in 2024 may not be sustained in FY25 due to inferior farm economics owing to the wheat price crisis, lower maize cultivation, and a considerable decline in the production of cotton bales.