Karachi: AKD Securities roll over its financial model and downward revises its target price of Millat Tractors Limited (MTL) to PkR32O/share.
According to AKD Securities, downward revision comes on the back of significant erosion of MTL’s tractor sales (down 53%YoY in 4MFY12) due to deteriorating rural dynamics (levy of GST on agricultural implements, soaring urea prices and declining cotton prices). In 4MFY12, total tractor sales dropped by 59%YoY to stand at 8,269 units, mainly on the back of higher retail prices, due to levy of 16% GST on tractors. As there seems to be no action on Government’s part to revoke the GST decision, AKD expects tractor sales to remain subpar going forward. AKD now has a Reduce stance on MTL (FYI2F PER: 14.1x) with 18% downside to its revised target price of PkR32O/share.
Worsened farm economics: A 17% GST levy was imposed on tractors for the first time in Apr’11. Tractor sales, however, did not decline much (despite FY11 floods) due to cash availability with farmers on the back of high cotton prices, while urea prices also remained low. FY12 however, brought bad omen for farmers, when 16%GST was permanently imposed on tractors. To add to farmer woes, caftan prices crashed and urea prices increased significantly due to a shortage of gas in the country. In 4MFY12, total tractor sales declined by 59%YoY to stand at 8,269 units. In the same period, MTL sold a mere 6,070 units, from 12,964 units sold in the same period last year. Tractor manufacturers have proposed to the Government to revoke the GST decision and impose it in phases over the next three years, but there has been no GoP actions so far.
Volumes even below FY09 levels: Previous two years have been beneficial for the tractor industry on the back of improved farm economics and the announcement of subsidy schemes. Punjab alone was benefitted by the Green Tractor Scheme (10k tractors at subsidized prices for Punjab only), and also the Benazir Tractor Scheme (10k tractors at subsidized prices country wide), due to its higher agricultural base. MTL, with its higher majority in Punjab, stands to benefit more from the subsidized tractor schemes. In the absence of these schemes, AKD Securities expects the company’s sales volumes to decline by 50%YoY to stand at 21k units in full year FY12F. Already, the company has registered a decline of 53%YoY in tractor volumes in 4MFY12. Decline in volumes is also on the back of decline in tractor volumes on the export front due to increased documentation for exports to Afghanistan.
FY12F earnings to decline by -62%YoY: On the back of low volumes, MTL has reported an earnings decline of 56%YoY fl 1QFY12 to post earnings of PkR244.4mn (EPS: PkR6.18) fl 1QFY12. As the cotton harvest/wheat sowing season mark a sequential increase in volumes, AKD Securities expects 2QFY12 to report sequentially improved earnings. However, no action on the GoP’s part to revoke/reduce the 16% GST may lead to lower volumes in the rest of the year. For this reason, AKD Securities expects MTL to report NPAT of PkR1.011bn (EPS: PkR27.6) in full year FY12F against NPAT of PkR2.671 bn (EPS: 72.9) in the previous year (a decline of 62%YoY). AKD now has a Reduce stance on MTL (FY12F PER: 14.1 x) with 18% downside to its revised target price of PkR320/share. GST reversal on tractors coupled with significant improvement in farmer economics remain key upside risks to its call.