Agricultural Tractors: Millat Tractors Limited - Analysis of Financial Statements February 2004-February 2007
SCANNER
OVERVIEW (February 04 2008): Millat Tractors Limited (MTL) was established in 1964 to introduce Massey Ferguson (MF) tractors in Pakistan. An assembly plant was set up in 1967 to assemble tractors in semi-knocked down (SKD) condition.
The company was nationalised under Economic Reforms Order in 1972 and started assembling and marketing tractors on behalf of Pakistan Tractor Corporation (PTC), which was formed by the government for import of tractors in SKD condition. In 1980 the government decided to produce indigenous tractors and entrusted this task to PTC. In 1981 MTL took over this task. This was the turning point in the company's history and it went about the task methodically and rapidly. Just in one year's time, the company took a giant step towards self-reliance by setting up the first engine assembly plant in Pakistan.
MTL made a strategic decision right in the beginning to bring those manufacturing facilities in-house for which capabilities did not exist in the country and for parts, which required high precision and investment. Therefore, in 1984, sophisticated manufacturing facilities for the machining of intricate components were set up. Currently, critical components like engine blocks, sump, transmission case, axle housing, hydraulic lift cover, front axle support and centre housing are all being machined most successfully in-house at MTL from local sourced castings.
In 1992, the company was privatised. The employees joined hands and took over the management by winning an open bid. To maintain its leadership role in tractor manufacturing in the country, MTL continues to look toward future, to identify and exploit new opportunities and to consolidate existing ones. The tractor assembly plant is part of this philosophy.
This plant started production in 1992. The establishment of this modern plant not only increased production capacity to 16000 tractors per year on a single shift basis, but also provided a quantum jump to the quality of the assembled tractors and pushed the MTL into ranks of the major tractor manufacturing companies of the world. In 1993, MTL also acquired the management control of Bolan Castings Limited (a public limited company specialising in intricate automotive castings) in partnership with employees of the company.
Now, Millat Tractors Limited is the leading company that specialises in the manufacturing of tractors, diesel engines, forklift trucks, and a range of other agricultural equipments. Presently, its market share hovers around 50% in terms of sales.
With a present production capacity of 30,000 tractors, the company plans to expand it to 40,000 in the coming years. Capacity utilisation, however, exceeds 150%. Machining capacity of major components is being bolstered along with "double shift" operation to come at par with the ever-growing demand. MTL has established a new company named Millat Industrial Products (Pvt.) Limited to manufacture quality automotive batteries.
At present MTL manufactures seven different models of tractors suitable for all agro-climatic conditions, size of farms and within the reach of the farmers of different segments. Currently, MTL has the highest deletion level of 90% and 55% in low engine and high engine capacity tractors respectively. The lower deletion level in high engine capacity tractors still makes it susceptible to exchange rate fluctuations. In the wake of appreciation, the company is at a greater advantage and vice-versa.
RECENT RESULTS:
The tractor industry registered new records of tractor production during FY07 and was able to deliver 54,325 tractors as against 49,462 tractors of the last year. The company delivered 27,127 tractors during the year as against 24,150 units of FY06, with an increase of 12.3% - recorded the highest ever yearly sales in the tractor industry.
Revenue for the company is mainly quantity-driven rather than price-driven, since the GoP has frozen the prices of locally produced tractors. In addition to this, changing economic scenario such as credit financing, interest rates, crop yield, support prices, along with unpredictable climatic conditions always pose a risk to the demand of tractors consequently influencing the company's sales volume. This is why the sales trend of MTL has been erratic.
Increase in demand of tractors on account of increased credit allocation by ZTBL and other commercial banks, better crop yield and farm products prices consequently spurred growth in booking of tractors till FY06. As a result, current liabilities of MTL increased hitting the liquidity position of the company.
The tractor bookings showed a downturn in FY07, but the company was able to increase its market share from 40% of the last year to 53% during 2006-07. As a result the liquidity situation has improved considerably in FY07 while the current liabilities registered a greater decline than current assets. Even though the current ratio is well above one, it still lags behind the industry average.
With major imports of CKD kits coming from UK, the gross profit of the company is directly related to the pound sterling to rupee price movement and leaves the company susceptible to changes in exchange rate. Furthermore, fluctuations in international steel prices also impinge on the company's gross profit ratio as evident from its irregular trend.
While the top line remained on the mercy of changing prices, the bottom line kept on strengthening on account of high bank returns. Since the deletion level of MTL is relatively lower in high engine capacity tractors, it is quite vulnerable to fickle exchange rate. While the appreciation of rupee against pound has proved to be beneficial in terms of cost of manufacturing, depreciation of rupee, on the other hand, has negatively affected the profit margins by increasing the cost excessively.
The above reasoning holds true for ROA and ROE as well. Lately, the profitability ratios are on the decline owing to exorbitantly high pound sterling rates against rupee as well as increase in input cost against constant selling price.
Owing to increase in demand for tractors and related agro-implements, inventory of the company increased exorbitantly. Thus, inventory turnover has been historically higher than the industry average. As a result, the operating cycle of MTL has also lengthened over the years under review. However, one can see a reversal in the trend in FY07 with ITO reducing to industry level thus bringing the overall operating cycle in line with the industry trend. This improvement can be mainly attributed to the contracts for supply of spare parts of Millat Generating Sets and Forklift Trucks to institutions.
Though sales/equity and TATO is declining till, it performs well than the industry average trend. Moreover, TATO has remained flat and sales/equity has also improved in FY07 owing to better utilisation of assets and equity
High advances from customers coupled with amount received from customers for warranty and maintenance services consequently increased the total debt of the company as evident from high debt-equity and debt-asset ratios. Long-term debt of the company which was near to the ground initially, has shown an upward march, showing MTL's increased reliance on long term loans, thus poses a threat in terms of interest rate risk.
The, interest coverage ability (TIE Ratio) of the company is high till FY06 mainly due to lower finance expenses owing to higher customer deposits, greater financial controls and borrowings at a lower rate. However, the TIE ratio plummeted in FY07 where declining EBIT was unable to cover exorbitantly high finance cost.
EPS is in line with the profit margins of the company. Since MTL imports CKD kits from UK, higher EPS was recorded when rupee was strong against pound sterling along with low steel prices in the international price making imports cheaper. On the contrary, a sharp dip was observed in FY06 owing to strong pound sterling against rupee as well as due to rise in material cost. Overall, the company performed well in terms of its EPS.
DPS has risen over the years while remaining below the industry average till FY06. BV per share however declined over the 4 years, as the number of outstanding shares increased.
FUTURE OUTLOOK:
High oil price in the international market is creating inflationary pressure on the economy. As a result, the cost of borrowing has become higher than the preceding years. This coupled with worldwide shortage of steel, which is gradually rendering the company inefficient in terms of manufacturing cost. Furthermore, the GoP has regulated the prices of tractors. This coupled with lower deletion level for new entrant is creating an uneven playing field. However, the proposal to allow local assemblers to increase the price of agricultural tractors is under consideration. This will provide a breather to the company and will consequently augment the company revenue.
Tractor industry trends have historically been cyclical but the demand curve over the last few years is positive and gives an optimistic outlook. The dilemma that the industry currently facing is of capacity constraint, with demand outpacing the supply. During H1-FY07, production has declined by 3.4% owing to the capacity restraints. Also, the government has allowed the import of tractors keeping the company at disadvantage. Nevertheless, MTL is planning to increase the production level to reduce the accumulation of pending orders with the co-operation of vending associates.
This will enable timely delivery of the tractors and equipments to the customers along with rise in production level. Moreover, the MTL offers after sales service to its customers, which will prove to be a formidable barrier against imported products (since foreign dealers don't provide after sales service) and new entrants.
Under new auto policy-AIDP, import duties on localised tractor parts have been reduced by 10% to 25% from 35% for the next five years. This will surely be a breather for the company, as it will greatly help the company in reducing cost of manufacturing.
Recently, new terms have been agreed with AGCO (successors to Massey Ferguson) under which Millat will have flexibility of global sourcing of components and will pay "Trade Mark" fee for brand use and technical support as required. This new agreement which took effect from FY07, is expected to help bring about price stability in the product range. Moreover, by implementing strategies such as financial controls, operational efficiencies, and marketing MTL can move forward to mitigate any negative impacts of WTO.
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AL-GHAZI TRACTORS LIMITED-KEY FINANCIAL DATA
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Income Statement (Rs '000) FY'04 FY'05 FY'06 FY'07
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Total Revenue 6,984,922 8,326,231 9,737,382 10,961,438
Cost of Goods Sold 6,137,586 ,398,872 8,444,544 9,832,853
General & Administrative
Expenses 103,245 84,247 189,173 325,823
Selling and Distribution
Expenses 124,286 130,461 154,042 183,303
Operating Profit (EBIT) 619,805 712,651 938,960 599,022
Financial Charges 11,185 2,552 3,054 15,997
Net Income Before Taxes 595,342 700,198 1,074,597 840,202
Net Income After Taxes 394,622 453,862 730,577 636,897
Balance Sheet (Rs '000) FY'04 FY'05 FY'06 FY'07
Stores & Spares 27,760 30,308 37,630 44,081
Stock in Trade 1,402,533 2,314,457 2,283,929 1,840,082
Cash & Bank Balances 649,715 297,843 263,139 19,144
Total Current Assets 3,135,606 5,847,963 6,631,480 5,344,140
Property, Plant & Equipment 240,587 238,783 279,210 359,443
Total Assets 3,552,330 6,322,802 7,453,542 6,264,324
Total Current Liabilities 8,980,771 15,021,848 16,911,300 13,827,133
Total Non Current
Liabilities 20,384 183,157 243,344 301,578
Total Liabilities 2,003,782 4,347,672 5,060,199 3,567,744
Paid Up Capital 80,094 120,141 156,183 187,420
Total Equity 1,548,548 1,975,130 2,393,343 2,696,580
LIQUIDITY RATIO FY'04 FY'05 FY'06 FY'07
Current Ratio 1.56 1.35 1.31 1.50
ASSET MANAGEMENT FY'04 FY'05 FY'06 FY'07
Inventory Turnover(Days) 73.72 101.38 85.83 61.88
Day Sales Outstanding (Days) 6.19 5.77 5.92 9.06
Operating cycle (Days) 79.90 107.15 91.75 70.94
Total Asset turnover 1.97 1.32 1.31 1.75
Sales/Equity 4.51 4.22 4.07 4.06
DEBT MANAGEMENT FY'04 FY'05 FY'06 FY'07
Debt to Asset(%) 56.41 68.76 67.89 56.95
Debt/Equity (Times) 1.29 2.20 2.11 1.32
Times Interest Earned (Times) 55.41 279.25 307.45 37.45
Long Term Debt to Equity(%) 1.32 9.27 10.17 11.18
PROFITABILITY (%) FY'04 FY'05 FY'06 FY'07
Gross Profit Margin 12.13 11.14 13.28 10.30
Net Profit Margin 5.65 5.45 7.50 5.81
Return on Asset 11.11 7.18 9.80 10.17
Return on Common Equity 25.48 22.98 30.53 23.62
MARKET VALUE FY'04 FY'05 FY'06 FY'07
Earning per share 32.85 37.78 33.98 38.00
Price earning ratio 8.52 5.51 9.48 9.87
Dividend per share 13.00 15.00 20.00 9.05
Book value per share 193.34 164.40 153.24 143.88
Number of shares issued 8009.4 12014.1 15618.3 18742
Market Price(year end) 280 208.00 322.00 375
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COURTESY: Economics and Finance Department, Institute of Business Administration, Karachi, prepared this analytical report for Business Recorder.
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Copyright Business Recorder, 2008