A buy call for shares of Millat Tractors

We maintain our Buy stance on MTL with a new June 2022 TP of PKR1,460/sh (up from PKR1,182/sh earlier; bonus adjusted), where positives stem from higher-than-expected sales growth and gross margins amid rising farmers’ income.

Farmer income will have another impetus from the govt.

Package to be announced in FY22 Budget, following a good year of crop yield, which will accelerate the rebound in tractor sales, in our view. We thus raise our volume assumptions by 18% in FY22/23f to c.38,000/40,000 units.

MTL’s handsome payout policy is likely to continue (5yr avg payout ratio of c.100%); FY21/22f D/Y stand at 11%/12%. Other catalysts for the stock include higher profits from Nishat Hyundai.

Raise TP to PKR1,460/sh; reiterate Buy rating

We reiterate our Buy stance on Millat Tractors Ltd (MTL), with upgraded estimates and a new June 2022 TP of PKR1,460/sh, up from PKR1,182/sh previously. The strong momentum in tractor sales during 10MFY21 (nearly doubled yoy) is likely to continue amid significantly improved farmer dynamics compared with pre-pandemic levels, where the income from major crops (wheat, rice and sugarcane) has risen substantially during FY21, as per channel checks. On top of that, the government’s focus on the agriculture sector is likely to continue, with an expected pro-farmer Budget (PKR110bn incentive package planned), which is likely to accelerate growth, in our view. We therefore raise our volume assumptions by 18% in FY22/23f to c.38,000/40,000, from c.32,000/34,000 expected earlier. Hence, MTL is expected to have average earnings growth of c.19%/8% in FY22/23f; and it is offering DY of 11%/12%.

Government’s incentives package is another impetus

Timely measures from the government at the outset of the Covid-19 pandemic – combined with the rally in global commodity prices since November 2020 – has significantly lifted farmer income in FY21. The recently proposed Agriculture Transformation Plan of PKR110bn (to be approved in the FY22 Budget) is likely to elevate farmer income further, in our view. The plan entails various measures aimed at increasing crop yields, while subsidizing input costs over a period of three years (details inside). The expected continued surge in construction activity due to various private housing schemes (Naya Pakistan, low income housing) and future public infrastructure projects will lift the demand for tractors used for haulage purposes as well.

For these reasons, we expect industry tractor sales to nearly double from pre-pandemic levels – similar to the sales performance during FY16-18f (doubled during the period and MTL’s tractor sales peaked at c.43,000 units in FY18) when the PML-N government rolled out incentive measures to lift farmer income. MTL has a nearly captive c.60% market share in Pakistan.

Handsome payout policy will continue

We expect MTL to maintain healthy payout ratio in future (previous 5yr average payout of c.100%), where we forecast D/Y of 11%/12% for FY22/23f. Additional catalysts for the scrip include (i) higher Hyundai sales amid growth in Autos sector through additional model launches (recent launch of the Hyundai Elantra sedan competes with the Toyota Corolla and Honda Civic), (ii) higher-than- expected growth of tractor exports, and (iii) improvement in earnings of subsidiaries and associate companies (higher dividend income).

Features of the Agriculture Transformation Plan

The government is expected to allocate PKR25-30bn in FY21, and the remaining amount in the following two years. In the past, the PML-N government announced the Kissan Package in FY16, which led to a surge in tractor sales (grew by a CAGR of c.45% in the next three years).

The features proposed in the Agriculture Transformation Plan, expected to be announced in the FY22 Budget are given below.

Subsidies on fertilizer up to PKR1,000/bag.

Measures aimed at increasing the production of cash/non-cash crops through improved farming methods and seeds.

Increasing agriculture lending by 80% to PKR2.7trn over the next two years, from PKR1.5trn presently.

Increase in yields of livestock – milk and meat.

Courtesy – Intermarket Securities Limited

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