Millat Tractors (MTL) has reported a consolidated 3QFY21 NPAT of PKR1.8bn (EPS: PKR32.77), up 4x yoy from a NPAT of PKR454mn (EPS: PKR8.1) and up c.10% qoq. This takes 9MFY21 NPAT to PKR4.8bn (EPS: PKR85.26). The 3Q result is lower than our expected EPS of PKR37.42, where deviation stems from (i) lower gross margins, and (ii) higher Opex.
Key result highlights for 3QFY21:
Revenue is up c.30% qoq to PKR13.4bn (in line with our expectations) led by a c.25% qoq rise in volumes to c.10,400 units, while nearly doubling yoy from c.5,400 units SPLY.
Gross margins have declined by c.3ppt qoq to 24%, lower than our expectation of 27%. This may be due to an increase in raw material prices following uptick in both global steel and freight charges, in our view. Despite the c.5% price hikes in January 2021, less than full pass-on of rising input prices seemingly led to margin compression, in our view (due to the high price elasticity of tractors). Note that BCL, an associated company and supplier of MTL, witnessed an increase in margins during the same period – potentially due to better passing on of costs to MTL.
Distribution expenses rose a staggering c.90% qoq, while admin expenses increased by 40% qoq. The former may be because of an increase in both local and export sales, where on a qoq basis an increase in freight rates amid risng fuel costs and global port congestions, may have led to the increase, in our view. Other income rose to PKR102mn from PKR96mn qoq, due to higher cash balances, in our view.
Finance costs, declined by 25% qoq (albeit from a low base), due to the repayment of short term borrowings, in our view. Effective tax rate clocked in at 26%, likely due to an increase in exports.
Despite the earnings miss, we believe that margins are likely to improve in the coming quarters amid strong sales momentum, due to improved farmer dynamics, normalizing of input costs and recently announced Agriculture Transformation Program (worth PKR300bn in incentives for farmers). We have a Buy stance on MTL with a June 2021 TP of PKR1,182/sh.
Courtesy – Intermarket Securities Limited