Morning Call about Autos – Arif Habib Limited

Karachi, November 16, 2012 (PPI-OT): Tractor sales: Rally on its way!

Though Arif Habib Limited does not actively cover the Tractor segment of the Automobile sector, Arif Habib Limited has tried to form a view on this segment that is expected to gain further traction given the developments being in the pipeline.

According to Arif Habib Limited, in this regard, Arif Habib Limited has mustered up some useful piece of information gathered from various channels i.e. industry players, government and other stakeholders, to flag potential outperformers ahead.

First to mention in this regard is that, under the Chief Minister’s Green Tractor Scheme 2012-13, the process of computerized draw for provision of 10,000 tractors to farmers in 36 districts of the Punjab province has been completed.

Punjab government tractor scheme to boost quarterly Tractor sales

As per Arif Habib Limited’s industry channels check, the Punjab government tractor scheme, previously concluding in Jun-13, will now be completing in Dec-12. The rationale behind this early completion is the expected increase in the GST, from 5% to 10%, by the Federal government. Therefore before the price goes up amid higher tax, the Punjab government desires to complete the scheme that is expected to substantially increase tractor sales volumes by 10,000 in the on-going quarter, which was earlier planned to be completed by Jun-13. Consequently, Arif Habib Limited expects a price rally in the tractor manufacturing companies’ scrip’s in the following months.

What do the numbers suggest?

As per the latest Auto sales figures, Tractor sales went up enormously by 125% MoM in Oct-12, to 5,712 units. Al-Ghazi Tractors topped with massive sales growth of 87% YoY and 300% MoM, to 2,338 units, followed by Millat Tractors that also posted significant sales growth of 20% YoY and 68% MoM, to 3,374 units. Arif Habib Limited can clearly see the magnified impact on both the companies’ sales, as the deliveries of the subsidized tractors commenced from 1st October 2012 onwards. Arif Habib Limited’s channels revealed that till 13 Nov-12, around 5,500 tractors have already been delivered to farmers by the companies. Arif Habib Limited has already seen, as discussed above, the portion as well as the velocity of these sales recorded during Oct-12.

Who will be the major beneficiary?

Millat Tractor (MTL: PA) and Al-Ghazi Tractor (AGTL: PA) were able to qualify for the supply of the aforesaid scheme through a tender given by the Punjab government. As per Arif Habib Limited’s discussion with the agriculture ministry, approximate market share of Millat Tractor stands at 55% while Al-Ghazi has managed to take away remaining 45% share of the scheme. As a result, Arif Habib Limited anticipates sales of Millat Tractor and Al-Ghazi Tractor to be 5,500 and 4,500 units, respectively. These sales will result in higher earnings for the companies in Dec-12 ending quarter.

Financial HighlightsEBITDAEPST12MROAROEDvd YldP/BP/E
Al-Ghazi Tractors Ltd

2,279

31.65

24

35

8%

1.71

5.32

Millat Tractors Ltd

3,176

54.03

20

38

12%

3.77

9.84

Source: Company accounts and AHL Research

Al-Ghazi Tractor

Arif Habib Limited expects the company to post profit after tax of PKR 1,750 million (EPS: 40.75) for CY12, translating a gigantic growth of 129% YoY. This increase is mainly attributable to the spectacular growth expected of 21% YoY in volumes. On quarterly basis, Arif Habib Limited expects the company to post profit after tax of PKR 406 million (EPS: 9.45), a growth of 25% QoQ, mainly on account of the Punjab government scheme. Given Arif Habib Limited’s full year EPS expectation for CY12, the stock of Al-Ghazi Tractor is currently trading at a CY12F PE of 5.3x and an appealing dividend yield of 19% (assuming 100% payout ratio against last 2-year average of 110%).

Millat Tractor

As per Arif Habib Limited’s estimates for FY13, the impact of the Tractor scheme on company’s earnings will be PKR 232 million, ceteris paribus (EPS impact: PKR 6.33) translating into a growth of 12% YoY. The company has also recently announced a price increase of 5.6% effective from next month onwards. However, the scheme will have no impact of this increase as the Punjab government has locked down the prices of the tractors for the mentioned scheme. The stock of the company is trading at a FY12A PE and dividend yield of 9.84x and 12%, respectively.

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