We have a Buy stance on MTL with a June 2021 TP of PKR902/sh. The government’s Agriculture package promises to lift the income of farmers and make tractors relatively more affordable for them. This drives our estimate of a 3yr Sales/EPS CAGR of 18%/20% for MTL.

The key catalyst for tractor sales is the reduction of GST to 0% (previously 5%). The last time GST was reduced in FY17, overall tractor sales grew by c.50% per year during FY17/18. However, this new cut will likely be in place for one year, unlike the previous change.

We expect MTL to continue its benign payout regime (average 5yr historical payout ratio of 109%). It is presently offering FY21/22f DY of 7%/8%. Other triggers can emanate from its stake in Hyundai Nishat Motors (earlier-than-expected profits) and increasing exports.

Government’s Agriculture package to trigger sales growth

We have a Buy stance on Millat Tractors (MTL), backed by an expected rebound in demand for tractors due to the recent government measures aimed at lifting farmer income amid Covid-19 outbreak. Our June 2021 SoTP based TP is PKR902/sh. The PKR50bn Agriculture support package announced by the government entails subsidy on fertilizers and other key inputs, removal of GST on tractors for one year, and reduction of markup on agri-loans. The previous reduction in GST on tractors (from 10% to 5% in FY17) led to an average 50% yoy increase in overall sales during FY17/18 (also complemented with subsidies on other inputs for farmers). With MTL commanding a c.60% market share in this industry, we expect Sales/EPS CAGR of 18%/20% over FY21-23. Note that the package is in place for one year, but we think the PTI government will remain pro-agriculture ahead of the next general elections in 2023.

Strong profitability and stable margins

While MTL has maintained a c.60% market share (remaining mostly with Al Ghazi Tractors) it has also demonstrated relatively stable gross margins of c.20% in the past 5yrs (despite c.34% PKR/USD depreciation since 2018). The key distinction with MTL is a very high localization level (c.95%) partly due to backward integration in tractor parts (Group companies supply c.25% of its inputs). Also, MTL is dominant in the Punjab province, partly because its Massey Ferguson (MF) tractors are perceived more suitable for the soft terrain in Punjab, in our view, and they are also used for haulage purposes. Backed by these factors, our sales growth outlook and a healthy payout ratio, we expect MTL to maintain high ROEs of over 50% in the future.

Other triggers include Hyundai Nishat Motors and exports

MTL has an 18% stake in Hyundai Nishat Motors (HNM) having invested c.PKR16bn (US$120mn) in the company. HNM commenced production from January 2020, with the H-100 Porter LCV as its first locally assembled vehicle. Before Covid-19, HNM had plans to assemble three cars in Pakistan (two sedan and an SUV) in the next 18 months (details inside). MTL has also seen growing exports to Africa (albeit gradual) in the past two years, due to cheaper prices than are globally. An acceleration of exports (still dwarfed by local sales) can also be fruitful for future profitability. Both these triggers are not yet incorporated in our estimates (HNM is valued at its investment value). (Intermarket Securities Limited)