Equity Analysis /
Pakistan

Pakistan Tractors: Headwinds to dampen growth; maintain Marketweight

  • We remain Marketweight on the Tractor sector despite headwinds in the form of margin attrition and sluggish demand

  • Remain Neutral on MTL (TP PKR740/sh) & continue to prefer MTL for its frequent payouts and better strategic positioning

  • We trim our Target Price for AGTL by 5% to PKR375/sh, while retaining our Neutral rating for the scrip

Intermarket Securities
27 October 2022
  • We retain our Marketweight stance on Pakistan Tractors despite multiple headwinds in the form of margin attrition and sluggish demand outlook in FY23-24f, amid potential contraction in farm economics from recent floods.

  • IMS Tractor Universe has recently witnessed a steep decline in gross margins owing to higher input costs and sluggish demand. Margins may further deplete if the government decides to increase GST to 17% in order to fulfill revenue targets (seems difficult in election year but not impossible). 

  • In light of the ongoing cost push inflation and macroeconomic challenges, we trim our FY23-24f EPS estimates by 5% on average. Despite the higher upside for AGTL (TP PKR375/sh), we continue to favor MTL (TP PKR740/sh) due to more frequent payouts and better strategic positioning.

Continuing Marketweight stance despite challenges

We retain our Marketweight stance on the sector, upgrading the TP for MTL to PKR740/sh (previously PKR643/sh) and downgrading the TP of AGTL to PKR375/sh (previously PKR395/sh). We also cut our 2023-24f EPS estimates by 6% on average. The downward revisions stems from i) sharp volumetric decline in sales witnessed in 1Q, which may extend across FY23, ii) continuous decline in gross margins amid PKR devaluation and inflation, iii) working capital constraints amid piling up of GST refunds, and iv) moderating farmer incomes owing to the devastation from the recent floods and re-rating of commodity prices. Although the government abolished the (General Sales Tax) GST on the sector in Budget FY23, both companies are still accruing the 5% levy, amid lack of clarity in the bill. The uncertain macroeconomic environment revives the risk of an increase in GST to 17%, posing a key risk to our volumetric sales assumptions.

MTL: Healthy payout to offset earnings constraints

We shed our volumetric assumptions by 23%/21% to c.28,000/30,000 units from c.37,000/38,000 units, lowering our FY23/24f earnings estimates by 25%/22%. The reduced demand follows weak 1QFY23 sales amid production pressures (likely to remain in FY23/24f), and potentially unfavorable farm economics. Other factors are i) working capital challenges stemming from the delays in GST refunds, and ii) continued pressure on tractor exports owing to weak global demand conditions. On the flipside however, we like MTL for i) it’s historically dominant market presence, ii) track record of healthy payouts (both cash and stock dividend), iii) high ROEs, iv) investment in Hyundai Nishat Motors, and v) potential to increase tractor and non-tractor exports, when the global economy improves.

AGTL: Prolonged margin contraction can derail thesis

Although we retain our Neutral stance on AGTL, we trim our TP by 5% from PKR395/sh to PKR375/sh, despite increasing our CY23/24f EPS estimates by 13% on average. Along with our EPS estimates, we have revised upwards, our volumetric sales assumptions for CY23/24f by 17%/20% to c.19,000/21,000 units (against c.17,000 units each earlier). However, continued pressure on margins is a key risk, as witnessed in 3QCY22 (GMs of just c.8%). We therefore estimate gross margins of 18% for CY23/24f, down c.1ppt from our last revision. Another key risk is the rise in debt level amid delays in GST refunds and possible risk of losing the recently gained market share. On the flipside, AGTL has a history of paying healthy dividends (c.100% payout rate since 2016), where, a sharp improvement in margins and retention of market share can improve our liking for the scrip.