Equity Analysis /

Pakistan tractors: Expect no respite as volumes continue to decline

    Ahmed Raza
    Ahmed Raza

    Investment Analyst

    Intermarket Securities
    21 August 2019

    During Apr-Jun’19, we project tractor industry profits to decline to PKR1,282mn, down 31%yoy/15%qoq. During this period, industry volumes declined by 32%yoy/4%qoq, while we expect slight attrition in gross margins (on sequential basis) due to PKR depreciation and inflationary trend. Tractor volumes have remained on a downward trajectory since early FY19 due to lower agricultural growth, higher farm input prices and absence of subsidy schemes.

    The decline in profitability for Al-Ghazi tractors (AGTL) is more severe than for Millat Tractors (MTL) due to (i) higher volumetric decline on both yoy and sequential basis and (ii) short term borrowings to support working capital. However, we think both companies will maintain dividends compared to Oct-Dec’18 levels (tractor OEMs follow a bi-annual payout policy). This is backed by a 15% improvement in projected profits in 2HFY19 over 1HFY19.  

    As we expect the volume decline to continue during FY20, the investment case for tractor companies remains weak. Historically, a reduction in sales tax (it is already low at 5% compared to 17% for other sectors) or direct subsidies (announced close to election season) have been major demand drivers, which are unlikely in the near term. A potentially positive trigger could be greater than expected growth in the agricultural sector.

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