Al-Ghazi Tractors Limited

Al-Ghazi Tractors Limited (PSX: AGTL), one half of the tractor duopoly in Pakistan, was incorporated in 1983. Nearly 40 percent of Pakistan’s tractor market belongs to the company as of 2016, and Rs40.3 billion in market capitalisation makes it one of the top auto stocks on the PSX. Dubai’s Al-Futtaim Group is the parent company.

Having 90 percent of its revenues from the core business of tractors, Al-Ghazi is also involved in the production of generators and various agricultural implements such as cultivators, ploughs, sprayers, etc. It has over 3000 mechanical workshops spread across the country.

Stock price & pattern of shareholding

Staying below the KSE100 for the most part of the year, AGTL stock saw some gains in October and again around April. Not too impressive a performance overall, however, given the turnaround in the company’s sales and gross profit during the year.

Approximately half of AGTL is with Al-Futtaim Group, while 43 percent is in the hands of Case New Holland – a world leader in agricultural and construction equipment. Meanwhile, approximately five percent of the company’s shares are in the hands of the local public, which is entirely local.

Prior performance

Even though its top line had barely moved from 2013 to 2015, Al-Ghazi has shown some effective cost management, with gross profit and gross margins inching up each year. In 2016, the company’s top line finally shot up by 29 percent year-on-year, reflecting the improvement in the agri environment and policies in the latter half of the calendar year/onset of the fiscal year 2017; though the bottom-line was lower on account of lower investment income and higher taxation.

Sales in terms of units and production highlight the three-year slump and eventual rebound at the end of 2016. Just exactly what caused the drop from the historic 2012 levels cannot be said, as the Director’s Report is unavailable for those years. One major factor, however, could be the sales tax on tractors, which was brought down to a historic low of five percent in FY12. However, it was subsequently raised to 10 percent in FY13; 17 percent in FY14 and FY15; brought down to 10 percent in FY16; and again reduced to five percent in FY17. Notwithstanding other factors, the GST rate does account for some of the behaviour of Al-Ghazi’s top line.

Coming to the product, Al-Ghazi claims its produced tractors in all HP ranges are the cheapest quality tractors in the whole world, while its products in the 55, 65, 75 and 85 HP categories carry a local content of 92 percent – the highest in the country. Exports, however, are negligible – less than one percent of sales. Not that the company doesn’t realise the potential; as per the last annual Director’s Report, Al-Ghazi has diversified its business into manufacturing of agricultural machines with potential to export.

Recent performance

An enormous turnaround is continuing its momentum from last year; for the first quarter of 2017, Al-Ghazi’s top line grew by a whopping 76 percent year-on-year during the quarter, while gross profit and net profit doubled. A dividend of Rs12.5 per share was announced.

In its quarterly Director’s Report, Al-Ghazi reports a 64 percent year-on-year increase in the number of tractors delivered. Reasons for the growth include improved farmer’s economic health, recognition of company’s quality initiatives, and the launch of a new model, ‘Dabung.’

Having just witnessed one of the worst years in its history (FY16), the tractor industry found relief in FY17: the sales tax was brought down to five percent as against the previous 10 percent; faulty tractor schemes by the provincial governments did not come into play during the year; and purchasing power of the farmers improved thanks to various measures such as fertilizer subsidy and Kisan package.

Outlook

On top of the slew of agricultural measures announced in budget FY18, the continuation of previous policies, and the fact that the sales tax is expected to remain at five percent, Al-Ghazi has some things of its own to offer. Recently, the company signed a corporate partnership agreement with Meezan Bank Limited and Karandaaz Pakistan to offer a fast-track financing solution to its small- and medium-sized vendors, as per the last Director’s Report.

New products are also being introduced; Al-Ghazi has brought in a first-of-its kind New Holland Brand Combine Harvester into Pakistan for trial. Soon, the company will explore the opportunity to commence assembly of these Combines locally in collaboration with Case New Holland.

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Al-Ghazi Tractors Limited


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Rs (Million)              1QCY17   1QCY16           YoY


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Sales                      4,964    2,815           76%


Cost of Sales              3,467    2,061           68%


Gross Profit               1,497      754           99%


GP Margin                    30%      27%     up 60 bps


Distribution Cost             60       24          150%


Administrative Expenses       59       56            5%


Other Income                  34       52          -35%


Other Operating Expenses      97       50           94%


Finance Cost                   0        0             -


Profit Before Taxation     1,314      676           94%


Taxation                     394      210           88%


Net Profit                   920      466           97%


NP Margin                    19%      17%  down 130 bps


EPS                        15.86     8.05           97%


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