Since FY17, the government has placed a GST of 5% on tractors, in order to improve mechanization in farming and elevate crop yields. The special rate was also continued in the recently approved Mini-Budget. However, as mentioned above, GST on tractors may be hiked to 17% in the upcoming FY23 Budget.

We highlight that historically GST increase has been a big negative for the sector. Sales nosedived c.30% yoy when GST was last increased in 2014. Having said that, a subsidy of the same amount – worth about PKR12bn on nearly 60,000 tractor sales estimated for FY23f – will offset the negative price impact and moderate the decline in sales, in our view.

• As in case of Fertilizer producers, for both tractor producers, MTL and AGTL, the GST hike and potential delays in receipt of subsidy will lead to greater working capital requirements (increase in refunds from the government, which already stood at a combined c.PKR8.5bn by end-Sep 2021), in our view, with slight impact on earnings. However, a net increase in prices (if subsidy of a lower amount is given) will dampen our demand growth (lower than 5% estimated for FY23), earnings and dividends.
• Due to the importance of the sector, a handsome subsidy is highly plausible, in our view. We therefore remain Overweight on the Tractor sector, preferring MTL (TP of PKR1,200/sh) as our top pick.

Courtesy – Intermarket Securities Limited