The company has a technical collaboration with CNHI - Case New Holland to manufacturing Holland (Fiat) tractors in Pakistan. CNHI is a global manufacturer and supplier of tractors, combines, excavators, wheel loaders, trucks, buses, firefighting and civil protection vehicles to powertrain solutions for on and off road and marine etc. Its second biggest associate, the group holds 43 percent of Al-Ghazi's shares and is present in over 190 countries. Since, more 93 percent of the shares of Al-Ghazi are held by associate companies, individuals in the market hold less than 1 percent of the company's shares.
The company manufacturers variants of tractors as well as generators and agricultural implements like cultivators, ploughs, sprayers, etc. Tractors make up for Al-Ghazi's core business. The company used 92 percent local content in the business using only a small share of imported content in manufacturing. The company currently has a capacity of manufacturing 30,000 tractors in a single shift. Over the years Al-Ghazi's capacity utilization has remained between 40- 55 percent, which grew to 82 percent in CY18. During 2017, the company renewed its industrial collaboration agreement with CNHI to assemble and sell new Holland tractors in Pakistan. The company exports but they have a very small share in total of company's sales.
Operational and financial performance Al-Ghazi has a strong position in the market given that there are only three players that dominate the market-about 96 percent or so-whereas the small players take up the leftover 4 percent. Al-Ghazi's share in terms of sales has remained between 35 percent and 45 percent, while growing to more than 50 percent during 2001, 2006, 2007 and 2009.
Tractor demand is sensitive to government policy for agriculture and ancillary sectors (including such as, sales tax regime on tractors), agriculture yield which is itself linked to consumption on the demand side, and water availability and weather conditions on the supply side; farmer's purchasing power, farmer's access to finance, cost of borrowing; and price mechanism of the company. For instance, during times when the government raised sales taxes, tractor sales dropped. Al-Ghazi's sales could not be shielded from these changing dynamics either, which is one of the reasons for their fluctuations over the years.
In terms of volumes, both CY17 and CY18 were good years for Al-Ghazi. Improved farmer's economic health together with sales tax reduction to 5 percent while also the then-government's efforts to offer subsidy on fertilizers, pesticides, and energy, while reducing mark-up rates on agricultural loans were all contributing factors.
However, CY18 saw margins shrink. Though the company has very high localisation levels, domestic inflation and cost of doing business including energy and gas prices etc. affects production costs. Import content is only about 8 percent of all raw materials, and though it is not a lot, currency movements have an impact on costs. Margins had reached 28 percent during CY17 from 19 percent in CY11, but fell down to 24 percent during CY18 due to the cost scenario.
Prices of tractors-for Al-Ghazi as well-are kept low. Lower prices compared to other players in the region also make tractor manufacturers more competitive in the global market, but since they have not advanced technologically too much, they have lost on gaining a foothold in global markets. Al-Ghazi tends to sell more of its lower horsepower tractors which are also partly because they are cheaper and partly because landholdings are small. There is a dearth of mechanization in farming and a huge scope for tractor manufacturers to venture in manufacturing-which they may do belatedly but is much needed. During CY18, Al-Ghazi launched the new Holland Brand combine harvester for trial and is currently exploring the possibility of selling imported new Holland combine harvesters, balers and 95 HP tractors. If the company localize these and can export, it would reduce it market concentration risk greatly.
Even since the third quarter of CY18, economic fundamentals were dwindling. Farmers were also facing a water crisis that was affected crop yields. The company started losing on demand. Rupee devaluation together with cost push inflation led Al-Ghazi to raise prices. Since farmer's purchasing powers are greatly dependent on their yield, some of Al-Ghazi's demand may have been lost if many could not absorb the higher price.
Outlook
During the first half of CY19, the company is already showing signs of lethargy. Volumetrically, tractors have gotten a beating dropping by 38 percent in 1HCY19 year on year. Revenues fell only 32 percent which means the tractors fetched better prices, but at the cost of what? Agriculture sector has been slowing down, as is the rest of the economy. As a result, Al-Ghazi's demand has suffered. Inflationary pressures also pushed down margins.
The company has also been facing liquidity issues due to not getting sales tax refunds from the government that are due. The sales tax refunds issue arises due to the difference in the rate of input tax (17%) and the output tax (5%). The company is claiming refund to the tune of Rs 2 billion. For now, the company has been utilizing its overdraft facility though at a much greater cost burden due to higher bank interests. In 1HCY19, the company's finance cost grew to 2 percent of revenues against 0.03 percent in the period previous year.
Though Al-Ghazi's demand is out of its hand, it must shore up its resources and start thinking about diversifying its markets, which would mean, investment in technology advancement and venturing into farm mechanisation elements. Exports would provide it a much needed shield. The economy is currently in slowdown and any economic recovery followed by government expenditure and changes in policy to boost agriculture will not come any time soon. For this, Al-Ghazi must prepare, and it must prepare well.
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Al-Ghazi Tractors (AGTL) Half year ending
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Rs (mn) Jun-19 Jun-18 YoY
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Sales 8,571.17 12,613.97 -32%
Cost of Sales 6,659.70 9,322.95 -29%
Gross Profit 1,911.48 3,291.02 -42%
Distribution expenses 151.36 153.44 -1%
Administrative expenses 147.40 165 20/43 -11%
Other operating expenses 100.14 207.33 -52%
Other income 36.10 35.05 3%
Finance cost 193.95 4,363.00 -96%
(loss) Profit before tax 1,354.72 2,795.48 -52%
Taxation 392.77 941.06 -58%
(loss) Profit after tax 961.94 1,854.42 -48%
Earnings per share (Rs) 16.6 31.99 -48%
GP margin 22.3% 26.1% -15%
NP margin 11% 15%
Volumetric Sales (units)
Tractors 9,838 15,778 -38%
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Source: PSX notice/PAMA
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Pattern of Shareholding (as on Dec 30, 2018)
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Categories of Shareholders %
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Associated Companies 93.19%
Al-Futtaim Industries Company LLC 50.02%
CNH Industrial N.V. 43.17%
Financial institutions 0.10%
Central Depository Company 6.17%
Individuals 4.54%
Investment companies 0.04%
Insurance companies 0.45%
Joint stock companies 0.08%
Financial institutions 0.60%
Modraba companies 0.00%
Mutual Fund 0.11%
Others 0.35%
Individuals 0.60%
Others 0.04%
Total 100%
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Source: Company accounts