The tractor sector is expected to post a combined NPAT of PKR2.40bn in the Jun’23 quarter, up 31% QoQ. Improved profitability will mainly be due to rising gross margins as the full effect of price increases from earlier in the year starts to materialise.
Superior localisation figures have allowed the industry to remain relatively insulated compared to the automobile OEMs. However, persistently high inflation continues to manifest in weak sales volumes. Total Tractor sales for 4QFY23 were down 56.0% YoY and 0.1% QoQ.
A higher effective tax rate during the quarter might hinder dividend-paying capability, especially for MTL, whose short-term borrowing remains elevated compared to AGTL. We expect MTL to pay a year-end DPS of PKR 7.00 and AGTL to pay a DPS of PKR 15.00.
Tractor sales remain static in the Jun’23 quarter.
Total Tractor sales remained similar to the previous quarter; however, there was a 56% decline in sales in the SPLY. In addition, a significant market share shift was observed compared to the previous quarter. Specifically, MTL experienced a 35% decline in sales this quarter, whereas AGTL’s sales demonstrated a remarkable 2.2x increase in QoQ. Our projections indicate that the industry’s revenue is poised to reach approximately c.PKR26.1bn, reflecting a substantial 21% improvement in QoQ. Despite the stable sales volumes, revenue is expected to rise primarily due to the full impact of the price adjustments carried out by the Tractor OEMs earlier in the year.
Gross margins will likely improve.
Superior localisation by the tractor industry has helped shield them against rising inflation. Anticipated industry gross margins are set to register at 22.6%, marking an upswing from the 19.6% reported in the previous quarter. This margin expansion is primarily attributable to the complete realisation of price adjustments. MTL is poised to witness a margin uptick, advancing by 3.5ppt to 24.2%. Concurrently, AGTL is expected to experience a more substantial margin growth of 5.5ppt, culminating in a margin of 20.6%. This accelerated margin expansion for AGTL can be attributed to its proactive early implementation of price hikes.
MTL’s profitability to be hit by taxation and finance cost
Total tax for the sector is expected to come in at 1.87bn during the quarter, up 3.1x QoQ. Taxation during the quarter will be elevated on account of additional super tax. MTL is expected to incur a higher effective tax compared to AGTL. This difference arises because MTL’s financial year concludes in the Jun’23 quarter. Furthermore, MTL’s profitability is anticipated to face additional pressure due to elevated finance costs. The company’s short-term borrowing reached PKR 7.86 billion during the quarter. AGTL, on the other hand, has negligible debt in its capital structure.
We remain market weight in the sector.
This year, superior localisation levels and an expected bumper crop of cotton will help support company earnings. Nonetheless, persistently high inflation and sluggish economic growth are expected to restrain demand in the medium term. Our position in the tractor sector remains at market weight, with a preference for MTL due to its ongoing market leadership position in the industry. Given the stock’s sharp runup this year, we would ideally wait for dips before building new positions.
Courtesy- Intermarket Securities Limited.