Al-Ghazi Tractors Limited (AGTL) engaged in manufacture and sale of agricultural tractors, implements, and spare parts. It manufactures tractors of various models, including 480-S (55 horse power), Ghazi (65 horse power), 640 (75 horse power), and 640 Special (85 horse power).

The company was established in 1983 and its headquarter is located in Karachi. Al-Ghazi Tractors Limited is a subsidiary of Al-Futtaim Industries Company LLC. The company has completed its capacity expansion in FY06, and enhanced its capacity up to 100%. Now, with an annual assembling capacity of 30,000 units and capacity utilization of more than 100%, Al-Ghazi Tractors Limited (AGTL) became country's largest tractor manufacturer.

The government of Pakistan fixed the prices of tractors for local tractor manufacturers since 1998, which is hampering the industry growth in terms of its sales. While the cost of manufacturing increased due to hike in interest rates, gas prices etc, the fixed selling price depressed the profit margins and the importers liberally charged the price of their own choice, thus creating an uneven playing field.

However in the budget 2007-08, GoP deregulated the selling prices of tractors. Now, the tractor manufacturers can increase the selling price of their tractors in order to support reduced margins because of higher steel prices. Thus any upward revision in tractor prices will improve the profits of the company.

RECENT RESULTS (FY'04-FY'07) Amidst the shortage of raw materials and disruptive rains in July and August curtailing the pace of desired production and sales, the company continues to strive to deliver good results in FY07, with 26,364 tractors delivered compared to 26,250 in FY06, thus bringing the total sales for the year to Rs 9.08 billion compared to Rs 9.02 billion in the same period last year.

The company earned a pre-tax profit of Rs 1.914 billion compared to Rs 1.910 billion in 2006. The post-tax profit for the year 2007 recorded an increase of 3.1% - up from Rs 1.229 billion in 2006 to Rs 1.267 billion in 2007, with Rs 647 million going to the tax authorities as income tax.

Robust demand for tractors owing to better performance of the economy, better crop yield and overall improvement in the buying power of the farmers are all contributing towards better liquidity position of the company with high cash balance, advances and inventory level. Thus, the current ratio is improving rapidly. With a current ratio above 2, AGTL fares reasonably better than its competitors.

Tractor orders from ZTBL are declining while cash advances from customers are increasing. Loaning from the Agricultural Development Bank (ZTBL) in particular continues to fall. With 9,871 tractors booked through ZTBL in the fiscal 2005-06, the number dropped to 6,650 tractors in 2006-07.

This is because credit disbursement by the banks for agriculture has decreased by more than 50%. Moreover, according to the SBP report, a number of small farmers are unable to avail the facility mainly due to inappropriate documentation such as non-availability of pass books resulting in hindrance to these farmers, eroding away a major part of tractor business from AGTL.

With one of the highest deletion levels in the industry (83%), exchange rate risk is the least for the company. However, fluctuations in international steel prices continue to affect the net profit of the company.

Fixed selling price since 1998 has hurt the revenue of AGTL due to high cost of manufacturing as indicated by irregular profit margin ratios of the company. High sales volume which was the main driver in FY06, along with the efficiency on part of AGTL towards cost reduction, resulted in declining margins in FY07. It has nevertheless, improved the ROE and ROA of AGTL in FY07.

Asset management ability of the company, though deteriorating in 3Q'07, has improved on a YoY basis. This can be attributed to speedy delivery, better management and control over the business processes.

Despite a very small DSO we see a sharp increase in FY07 from the same period last year mainly due to increased receivables. However, the overall FY07 operating cycle declined for the company. As evident from the operating cycle, the company is proficient in terms of converting its inventory into cash.

On the other hand, TATO and sales/equity has posted a declining trend in FY06 mainly attributable to new plant and equipment and high revenue reserves respectively. However, the company performed well in its asset utilization with increasingly better capacity utilization and further extensions in FY07.

Surprisingly AGTL does not have any long-term loans, thus its long-term debt-to-equity ratio is negligible. All expansions are either supported by short-term loans or equity thus keeping the debt ratios near to the ground. Consequently, financial expense for AGTL is on a lower side thus poses meagre threat in the wake of increase in KIBOR.

Thus, interest-paying capacity of AGTL (TIE Ratio) is fairly high, even compared to its competitors. Amongst the short-term liability portion of the balance sheet it is to be noticed that the main chunk is contributed by advance payments of the customers, which carry no mark-up.

This has allowed AGTL to invest in open-ended mutual funds considerably almost doubling the amount of investment carried on the balance sheet. Also, the mark-up is earned on the bank deposits account for a major proportion of other operating income.

Rising cost of material has affected the marketability of AGTL as well owing to high steel and gas prices. DPS (till FY06) is also decreasing. In general, the market value ratios performed well in recent years with its shares fetching the highest value of all listed stocks, thus maintaining lead over other automobile sector companies in Pakistan.

The share value reached an all time high and recorded a peak of Rs 298 for its five-rupee share, thus giving a market cap of Rs 12.795 billion to the company. The increasing BVPS and P/E multiple further signify investors' confidence in AGTL.

In FY07, the company announced a cash dividend of 350%. With the majority shareholding being with Al-Futtaim Industries Company LLC, U.A.E and CNH Global N.V., Netherlands, they stand to be the major beneficiaries of the generous dividends payout.

FUTURE OUTLOOK Overall, the company has performed well for the last 3-4 years and has been able to capture a significant market share of around 53%. Recently two new models of tractors were launched signifying the continuous growth and expansion on part of the company. The disbursement of loans in the agro sector by ZTBL has reduced significantly, thus leading to lower bookings in FY07.

The decision to deregulate prices in Budget 07-08 has fared well for the company's financials, as reflected on the company's accounts. The government had imposed 1% Special Excise Duty on sale of tractors effective from 1st July 2007. This was subsequently withdrawn; however an anomaly was created whereby local components being procured from local vendors continue to attract 1% Special Excise Duty. If this too is not withdrawn then it will create an additional burden on company's production costs and will eventually be passed on to the customers.

The revival of green tractor scheme may lead to higher sales for the sector, as the scheme provides a subsidy of Rs 0.1 million to the tractor buyers. But already the company is overbooked with the farmers having to wait for their delivery.

Although, the import of tractors is allowed duty-free, and the Tariff Based System affects company's costs, the deregulation of prices negates the impact of all the decisions taken earlier that impacted the industry adversely.