Equity Analysis /
Pakistan

Pakistan Tractors: Upgrade estimates upon clarity on GST; Buy

  • We upgrade our stance on both Tractor stocks from Neutral to Buy upon certainty that current GST will remain intact

  • Robust farmer income amid elevated commodity prices, bumper yields and govt. focus reaffirm our liking for the sector

  • We are Overweight on the sector with a Buy on both MTL (TP of PKR1,200/sh) and AGTL (TP of PKR495/sh); MTL top pick

Intermarket Securities
4 January 2022

We upgrade our stance on both Tractor stocks from Neutral to Buy, upon certainty that the government will maintain GST on tractors at 5%. We had previously downgraded our estimates in anticipation of a GST hike in the mini-budget, which has historically been a big dampener for sales.

Robust farmer income amid elevated global commodity prices and expectations of bumper yields of major crops reaffirm our liking for the sector. Also, renewed govt. focus on the agri-sector ahead of elections should sustain the present momentum in tractor sales, in our view.

MTL remains our top pick in the sector with a Buy rating and June 2022 TP of PKR1,200/sh, while AGTL is also upgraded to a Buy (December 2022 TP of PKR495/sh). Our liking for both companies stems from their benign dividend payout and high ROEs (avg. c.75% over the past 5yrs).

Investment case strengthened as a key risk did not come through

The removal of the uncertainty of the GST hike strengthens the investment case for tractors; as historically even a 5% hike in the rate had was followed by a c.30% fall in volumes, as seen in FY12 and FY14. Similarly, a decrease in taxation has triggered a sharp jump in sales in the past (2017). We therefore upgrade our rating on both the stocks to Buy from Neutral, where our target prices for the two stocks have risen c.30% on average. We add back MTL (June 2022 TP of PKR1,200/sh) to our top picks in the IMS Universe as it fits well with our investment themes for 2022. We also have a Buy rating on AGTL (December 2022 TP of PKR495/sh); where greater certainty on future payout policy will increase our liking for the scrip.

Upgrade estimates significantly

We raise our earnings estimates for the two Tractor stocks by c.5%/40% for 2022/2023f on average, in light of (i) clarity on GST remaining at 5% as per the supplementary Finance bill or Mini Budget (earlier anticipated to be raised to 17%), (ii) healthy c.20% yoy rise in sales in 5MFY22 to c.22,000 units, which is likely to be sustained, (iii) robust farmer income amid healthy crop yields and elevated commodity prices, which are unlikely to reverse in the near term, and (iv) renewed government focus on the agri-sector ahead of the elections due in 2023 (as happened ahead of 2018 elections).

We therefore raise our sales volume assumptions by c.20% for 2022-23f, although they are slightly lower compared with that before the earnings downgrade. Our new 2022/23f sales assumptions for MTL and AGTL are c.38,000/40,000 and 22,000/24,000 units respectively. We have also raised our gross margins by an average 3ppt for FY22/23f to c.25/24% for MTL and 23/22% for AGTL. Note that farmer income is already at healthiest levels in recent five years, courtesy a super-cycle in several major commodities such as cotton and rice (up 20-45% yoy in 2021), while the government has also increased minimum support prices of wheat and sugarcane by c.15% during FY22.

MTL added back to our top picks for 2022

In the prevailing macroeconomic environment (with high inflation and interest rates); the Tractor sector fits well with many of our preferred themes for 2022 (rural income, high ROEs and DYs). We expect both MTL and AGTL to maintain a healthy payout ratio of 90% (implying a D/Y of 12%/13% in 2022-23f) and decent ROEs (average c.75% in 2022/2023f). Our preference for MTL stems from (i) a focus on increasing exports in existing and new markets, (ii) diversification through investment in Nishat Hyundai, which is enjoying healthy demand for luxury cars in Pakistan, and (iii) greater certainty on dividend payouts, compared with AGTL.