Karachi: While tractor industry’s woes remain unaddressed at the Federal level, the Government of Sindh has decided to announce the subsidized tractor scheme which will sell 5000 tractors to growers at subsidized rates.
According to AKD Securities, Recall that subsidized tractor schemes were one of the main reasons for the uplift of tractor industry in the previous two years and market hearsay had earlier indicated shelving of these schemes for the current fiscal year. Re-launch of subsidized tractor scheme in Sindh should stir up diminishing tractor sales, especially for AGTL, which has a majority market share in the Sindh province. That said, as per recent company notices, AGTL and MTL have closed down their plants on the back of low bookings. As news reports indicate the ECC’s consideration of the GST issue, AKD Securities has kept AKD Securities’ recommendation over AGTL on hold, while MTL (trades at FY12F PER of 13.2x) offers a downside of 12% to AKD Securities’-target price of PkR320/share. Reduce!
Re-launch of Sindh Tractor Scheme and AGTL: According to news reports, the Sindh Agriculture Department has submitted the Subsidized Tractor Scheme to distribute 5k tractors to farmers at subsidized rates. Given the scheme is launched, it should provide some uplift to the diminishing tractor sales (due to the GST issue). It should be beneficial for AGTL in particular, given its majority market share in the Sindh province. While AKD Securities’ current sales volume estimates for AGTL for CY12F, at 21,420 units, lead to a CY12F EPS of PkR37.08, the launch of this scheme can lead to additional CY12F EPS of PkR15.51-PkR23.27. Moreover, in case other schemes (Green Tractor Scheme and Benazir Tractor Scheme) follow suit (prospects remain grim), tractor sales may be able to shake-off the GST effect.
Closure of tractor plants: As per company notices, both tractor manufacturers (MTL and AGTL) have closed down their manufacturing plants due to low bookings. While MTL has notified the closure to remain till Dec 31,’11, AGIL has stated that the plant will remain closed, till any notification by the government on the GST issue. Note that both the companies have collectively produced only 11,733 units (MTL: 8,797 units, AGTL: 2,936 units) in the period Jul’11-Nov’11 against 24,907 units produced in the same period last year, a decline of 53%YoY.
Investment Perspective: The Pakistan tractor industry has recently seen major negatives (GST imposition, adverse rural economy) since the start of the current fiscal year where absence of subsidized tractor schemes added impetus to the downside. Re-launch of these schemes should come as a respite for the tractor industry’s problems as news flow also indicates ECC’s consideration on the GST issue. While AGTL remains under review (until clarity on GST issue emerges), AKD Securities has a Reduce stance on MTL based on AKD Securities’ target price of PkR320/share.