Millat Tractors (MTL) has reported a consolidated 3QFY22 NPAT of PKR1.8bn (EPS: PKR21.86), down 5% yoy while up c.5% qoq. This takes 9MFY22 NPAT to PKR4.9bn (EPS: PKR60.84), up 2% yoy. The 3Q result is higher than our expected EPS of PKR18.87, where the variance stems from higher-than-expected gross margins.
Key result highlights for 3QFY22:
Revenue is up c.10% yoy to PKR14.6bn (slightly higher than our expectation), largely due to sharp increases in tractor prices, despite a 17% yoy decline in volumes. MTL increased prices twice during the quarter by a cumulative c.15%, amid a surge in global commodity prices.
Gross margins have declined by c.2ppt yoy (up 2.5ppt qoq) to 22.6%, higher than our expectation of 20%. The yoy decline in margins can be explained by an increase in raw material costs, freight charges, and PKR depreciation, in our view. On a qoq basis, the multiple price hikes in 3QFY22 are likely to have led to the improvement in margins.
Distribution expenses decreased by 8% yoy, due to the decrease in sales volumes during the quarter; Admin expenses declined by 18% yoy. Other income declined to PKR92mn from PKR102mn last year, potentially due to lower cash balances, in our view.
Finance costs increased to PKR115mn from PKR20mn last year, potentially because of increased borrowing amid slower sales tax refunds from the government and lower cash balances, in our view. The effective tax rate clocked in at 30%.
This is a decent result from MTL, led by improvement in margins, on the back of the multiple price hikes. Also, the strong farmer dynamics amid elevated crop prices and crop yields are likely to sustain the present growth in tractor sales in FY22. However, 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 Neutral stance on MTL (TP of PKR925sh), which is accompanied with a DY of c.10%.