Earnings Report /
Pakistan

Millat Tractors: 1QFY20 results: Earnings miss due to lower-than-expected gross margins

    Ahmed Raza
    Ahmed Raza

    Investment Analyst

    Intermarket Securities
    24 October 2019

    Millat Tractors Ltd (MTL) posted 1QFY20 unconsolidated NPAT of PKR356mn (EPS: PKR8.04), down 68%yoy and 59%qoq, which came in much below than our EPS expectation of PKR13.76.

    Millat Tractors Ltd (MTL) posted 1QFY20 unconsolidated NPAT of PKR356mn (EPS: PKR8.04), down 68%yoy and 59%qoq, which came in much below than our EPS expectation of PKR13.76.

    Major takeaways from MTL’s 1QFY20 result include:

    • 48%yoy decline in revenue as MTL sold only 5,094 units, down 52%yoy, amid lack of subsidies for farmers and growth issues with multiple large crops.
    • Gross margins of 16.3%, down 4ppt yoy, where we were expecting higher margins due to Jul’19 price increases. Major reason for margin compression is PKR depreciation against US$ (PKR was down c.11% against US$ in 4QFY19), even though MTL has very high localization but weak demand would have curtailed pass on ability, in our view.
    • Other income declined by 77%yoy to PKR23mn due to lower cash balances.

    We have a Jun’20 TP of PKR862/sh for MTL but we will likely revise it to factor in the disappointing result. Unit sales of the industry are declining more than our expectation and we expect the trend to continue in the remainder of FY20f.

    Risks: (i) Increase in taxes on tractors/parts, (ii) higher farm input prices, and (iii) damage to crops due to floods, pest attacks etc.