Al-Ghazi Tractors Limited (AGTL)

Al-Ghazi is one of the only two major players in the tractor industry and has been operational in Pakistan since 1983, starting production in 1984. The company manufacturers different tractor variants as well as generators and agricultural implements like cultivators, ploughs, sprayers, etc. The company has managed to attain 92 percent localisation in the business using only a small share of imported content in manufacturing.

Tractors make up for Al-Ghazi’s core business. The company’s plant is located in Dera Ghazi Khan with a capacity of 30,000 tractors annually in a single shift, currently operating at 66 percent utilization but has in the past operated at maximum capacity as well. The company is part of the Al-Futtaim Group in Dubai, which owns over 50 percent of the company. Al-Futtaim operates through more than 200 companies across the UAE, Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, Egypt, Pakistan, Sri Lanka, Syria, Singapore and Europe.

The company has a technical collaboration with CNHI - Case New Holland to manufacturing Holland (Fiat) tractors in Pakistan. CNHI is a global manufacturer and supplier of tractors, combines, excavators, wheel loaders, trucks, buses, firefighting and civil protection vehicles to powertrain solutions for on and off road and marine etc. The group holds 43 percent of Al-Ghazi’s shares and is present in over 190 countries.

Recent developments

Back in 2015, the company went in with Al-Baraka Bank on an MOU to avail Shariah compliant options for financing offered to tractor buyers. The company recently also signed a partnership agreement with Meezan Bank and Karandaaz Pakistan to offer fast financing solutions to SME vendors to facilitate them in building capacity and improving quality.

During 2017, the company renewed its industrial collaboration agreement with CNHI to assemble and sell new Holland tractors in Pakistan. This agreement also allows Al-Ghazi to export to Afghanistan. Moreover, the company re-launched Al-Ghazi premium oil, the tractor lubricant that according to the annual report is “specifically blended to maximise the performance of AGTL tractors and has a huge market potential in terms of refill of the 400,000+ tractors in the fields”.

Operational and financial performance

Being largely an agrarian economy, tractor manufacturing in Pakistan will always be a promising business, especially given that there are only two players operating in the country with potential to expand capacities if the need arises. Al-Ghazi has positioned itself well—it has maintained a market share between 35 percent and 45 percent, even grabbing more than 50 percent during 2001, 2006, 2007 and 2009.

Improving macroeconomic fundamentals, conducive government policies, consumption and performance of the agriculture sector linked to water availability and favourable weather conditions all indirectly drive tractor demand.

Over the years, changing government policies on taxation has led to the rise and fall of tractor sales. In 2011, the government levied a GST of 17 percent on tractor sales. This was brought down to 5 percent later in 2012, which was again brought up to 10 percent in 2013, and again to 17 percent in 2014, where it stayed for 2015 as well. As sales tax rose, Al-Ghazi’s sales also plummeted and market share dropped.

The year 2016 was not a good year for tractor players on the whole. Commodity prices had dropped, crop production was poor, which was hurting farmers’ purchasing powers. The tractors schemes announced by the two provincial governments were not implemented.

However, things took a positive turn during 2017. Sales tax was reduced back down to 5 percent. The government gave subsidy on fertilizers, pesticides, energy, and reduced mark-up rates on agricultural loans all helped boost the agriculture sector which in turn led to a boost in tractor sales. Agricultural output brought by higher production of kharif crops also contributed to higher sales.

Sales volumetrically grew by 55 percent during FY17 where the company’s top line grew by 56 percent growth during CY17. According to the company’s annual report, more than 24,000 units were sold during CY17 against 16,205 tractors the previous year—that’s a growth of 50 percent. There was also an improvement in net margins (17% from 16% in CY16) even as gross margins retained at 28 percent.

Since the company already has very high localisation (more than 90%), the company’s costs are not dependent on commodity prices abroad or the exchange rate. Domestic inflation and higher cost of doing business affect Al-Ghazi’s costs, which has been controlled. Profits grew by 1.6 times during CY17 brought forward by stronger sales and maintained direct and indirect costs.

During the outgoing year, the company launched the new Holland Brand combine harvester for trial and is currently exploring the possibility of selling imported new Holland combine harvesters, balers and 95 HP tractors. This has the potential to expand the company’s market share.

Outlook and opportunities

Policies of the government that are conducive to improving the working conditions of farmers will undoubtedly lead to higher tractor sales, but history shows that higher sales tax has affected sales of tractors over the years greatly. Sensitively to taxation will continue to pose a threat for Al-Ghazi.

However, in a burgeoning population like Pakistan with expanding consumption and improving infrastructure capabilities, the agriculture sector is set to see a strong boost. No doubt the sector will need better quality tractors with higher horse power and sophisticated engines. This is where Al-Ghazi’s initiative to introduce new versions of tractors will come in. Though, currently, its highest sales are in the low HP tractors that no doubt carry a lower price.

The company has a strong financial base and liquid investments while no bank debt or borrowings, which reduces the risks for the company. A positive factor in favour of Al-Ghazi is that it is highly localized, so it is not dependent on imported content and is not sensitive to exchange rate changes. The company adequately adjusts its prices according to the cost of raw material in order to keep margins secure.

The exporting market is one that Al-Ghazi can tap. Meanwhile, locally, if the reduced sales tax on tractors is maintained, and tractor schemes kick off while farmers find continued financing and policy support from government, Al-Ghazi will continue to grow.