Earnings Report /

Millat Tractors: 2QFY22 Review: Lower-than-expected gross margins led to earnings miss

  • MTL announced 2QFY22 EPS of PKR25.24, missing our EPS expectation of PKR31.06, amid lower GMs

  • GMs decreased by c.7ppt yoy amid rise in raw material prices, freight and PKR depreciation, in our view

  • We prefer MTL (TP of PKR1,200/sh) as our top pick in the Tractor sector due to its consistent payout and market share

Intermarket Securities
22 February 2022

Millat Tractors (MTL) has reported a consolidated 2QFY22 NPAT of PKR1.7bn (EPS: PKR24.25), down a mere 3% yoy while up 17% qoq. This takes 1HFY22 NPAT to PKR3.1bn (EPS: PKR45.04), up 7% yoy. The 2Q result is lower than our expected EPS of PKR31.06, where the variance stems from lower-than-expected gross margins. MTL announced an interim DPS of PKR45, against our expectation of PKR50 (though payout ratio is 100%, as expected).

Key result highlights for 2QFY22: 

  • Revenue is up c.40% yoy to PKR14.6bn (in line with our expectations), due to sharp increases in tractor volumes by c.20% yoy and prices. Tractor prices have increased by c.20% between January and November 2021, amid surge in global commodity prices. 

  • Gross margins have declined by c.7ppt yoy (down c.4ppt qoq) to 20.1%, lower than our expectation of 24.5%. The sharp decline in margins can be explained by an increase in raw material costs, freight charges, and PKR depreciation while price increases were delayed, in our view. Toward the end of November, MTL increased prices by c.10%, effective from the first week of December. We think GMs should improve in coming quarters as full impact of November price increase should be realized.

  • Distribution expenses decreased by c.35% yoy, despite a sharp increase in sales volumes during the quarter; while Admin expenses rose relatively softly by c.10% yoy. Other income rose to PKR142mn from PKR96mn last year, potentially due to dividends from associated companies, in our view.

  • Finance costs increased by c.55% yoy (albeit from a low base), potentially because of increased borrowing amid slower sales tax refunds from the government and lower cash balances, in our view. Effective tax rate clocked in at 28%.   

This is a weak result from MTL, led by falling margins despite revenue growth. However, price increase in November should improve margins in the coming quarters, in our view. Also, the ongoing government focus on Agri-sector, elevated prices and farmer dynamics are likely to sustain the present growth in tractor sales in FY22. We highlight that an emergent threat to our thesis is the possible reversal of GST incentives in light of IMF’s demand to remove all tax exemptions (given government fails to announce a subsidy to negate the rise in GST). We have a Buy stance on MTL (TP of PKR1,200/sh), our top pick in the Tractor sector due to its higher market share and consistent payout.