Al-Ghazi Tractors Limited

14 Jul, 2016

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.

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