Millat Tractors Limited (MTL) was established in 1964 to introduce and market Massey Ferguson (MF) tractors in Pakistan. An assembly plant was set up in 1967 to assemble tractors in semi-knocked down (SKD) condition.

The company was nationalised under Economic Reforms Order in 1972 and started assembling and marketing tractors on behalf of Pakistan Tractor Corporation (PTC), which was formed by the government for import of tractors in SKD condition. In 1980, the government decided to produce indigenous tractors and entrusted this task to PTC. In 1981, MTL took over this task. This was the turning point in the company's history and it went about the task methodically and rapidly.

Just in one year's time, the company took a giant step towards self-reliance by setting up the first engine assembly plant in Pakistan. MTL made a strategic decision right in the beginning to bring those manufacturing facilities in-house for which capabilities did not exist in the country and for parts, which required high precision and investment.

Therefore, in 1984, sophisticated manufacturing facilities for the machining of intricate components were set up. Currently, critical components like engine blocks, sump, transmission case, axle housing, hydraulic lift cover, front axle support and centre housing are all being machined most successfully in-house at MTL from local sourced castings.

In 1992, the company was privatized. The employees joined hands and took over the management by winning an open bid. To maintain its leadership role in tractor manufacturing, MTL continues to look toward future, to identify and exploit new opportunities and to consolidate existing ones. The tractor assembly plant is part of this philosophy. The plant started production in 1992.

The establishment of this modern plant not only increased the production capacity to 16,000 tractors per year on a single shift basis, but also provided a quantum jump to the quality of the assembled tractors and pushed MTL into ranks of the major tractor manufacturing companies of the world.

In 1993, MTL acquired the management control of Bolan Castings Limited (a public limited company specializing in intricate automotive castings) in partnership with employees of the company.

Millat Tractors Limited is the leading company that specializes in the manufacturing of tractors, diesel engines, forklift trucks, and a range of other agricultural equipments.

Presently the market share of MTL hovers around 50% in terms of sales. With a present production capacity of 30,000 tractors, the company plans to expand it to 40,000 in the years to come. Capacity utilization, however, exceeds 150%. Machining capacity of major components is being bolstered along with "double shift" operation to come at par with the ever-growing demand. The company has established a new company named Millat Industrial Products (Pvt) Limited to manufacture quality automotive batteries.

At present, MTL manufactures seven different models of tractors suitable for all agro-climatic conditions, size of farms and within the reach of the farmers of different segments.

Currently, the MTL has the highest deletion level of 90% and 55% in low engine and high engine capacity tractors respectively. The lower deletion level in high engine capacity tractors still makes it susceptible to exchange rate fluctuations. In the wake of appreciation, the company is therefore at a greater advantage and vice versa.

Revenue for the company is mainly quantity-driven rather than price-driven, since the GoP has frozen the prices of locally produced tractors. In addition to this, changing economic scenario such as credit financing, interest rates, crop yield, support prices, along with unpredictable climatic conditions always pose a risk to the demand of tractors consequently influencing the company's sales volume. This is why the sales trend of MTL has been erratic.

Pakistan's economic indicators remained robust during the year with the country meeting most of its macroeconomic goals. A record wheat harvest and upward revision in the production figures for key Kharif FY07 crops has raised the prospects of a strong recovery by the agriculture sector, which is likely to provide a spurt for tractor demand. The tractor market continues to grow which augurs well for agriculture and industry alike.

RECENT RESULTS 2007:

In FY07, the company achieved the highest ever sale of 27,127 tractors in the history of Millat Tractors Limited and the tractor industry in Pakistan, earning pretax profit of Rs 840 million on a sale of Rs 11 billion. With a market share of 50% in the total industry sales of 54,325 units, the company maintained its leadership.

The main reasons for decrease in profits was the exorbitant rise in pound sterling exchange rate as compared to Pak rupee as well as increase in material cost and other inputs, while tractor selling prices remained unchanged. The profit after tax decreased by 12.8% from Rs 731 million in FY06 to Rs 637 million in FY07.

The administrative, general and selling expenses increased to Rs 509 million as compared to previous year of Rs 343 million due to increase in sales volume.

During the year under review, the agriculture sector showed a growth of 5% against target of 4.5% due to an increase in farm mechanization, coupled with improved availability of irrigation water and other inputs.

This resulted in better farming income, thereby increasing the buying capacity of the farmers. Consequently, there was a substantial increase in tractor consumption during the year 2006-07.

The tractor bookings showed a downturn, but the company was able to increase its share of the market from 40% of the last year to 53% during 2006-07. Tractor industry trends have historically been cyclical but the demand curve over the last few years is positive and gives an optimistic outlook.

The company has a serious competition from the imported tractors, which a little less apprehensive in nature as the CBU tractors could not compete in prices, quality and after-sale support offered by MTL. Thus no adverse effect on MF tractor sales was observed. Supporting the government policy of enhancing farm productivity and accelerating the pace of farm mechanization in the country, MTL continued providing complete range of matching implements. As a result, sale of implements increased by 68% over the last year.

Spare parts operations continued to be under pressure due to competition with smuggled goods, expending undocumented sector, under invoiced imports and spurious low priced parts abundantly available all over the country. However, the demand for genuine and better quality spare parts through our existing network backed by a one year warranty was able to increase sales.

Contracts for the supply of spare parts of Millat Generating Sets and Forklift Trucks to institutions contributed to the total sales during the year under review to Rs 131 million from last year's Rs 116 million, an increase of 13% over the previous financial year with improvement in inventory turnover and gross profit ratio.

Increase in demand of tractors on account of increased credit allocation by ZTBL and other commercial banks, better crop yield and farm products, the prices consequently spurred growth in tractors booking. As a result, current liabilities increased hitting the liquidity position of the company. Even though the current ratio is well above one, it still lags behind the industry average.

In FY'07 however, on the back of record sales of tractors, MTL recovered its current ratio. The current assets of the company declined in consequent of lower stock in trade while the liabilities of the company were on a lower side thereby pulling up the liquidity position for the company.

With major imports of CKD kits coming from UK, the gross profit of the company is directly related to the Pound Sterling to Rupee price movement and leaves the company susceptible to changes in exchange rate. Furthermore, fluctuations in international steel prices also impinge on the company's gross profit ratio as evident from its irregular trend. While the top line remained at the mercy of changing sales price, the bottom line kept on strengthening on account of high bank returns.

Since the deletion level of MTL is relatively lower in high engine capacity tractors, it is quite vulnerable to fickle exchange rate. While the appreciation of PKR against Pound has proved to be beneficial in terms of cost of manufacturing; depreciation of PKR, on the other hand, has negatively affected the profit margins by increasing the cost excessively. As discussed before a simultaneous increase in the cost of operations as a result of increase in cost of material explains very well the declining trend in FY07.

The above reasoning holds true for ROA and ROE as well. Lately, the profitability ratios are on the decline owing to exorbitantly high pound sterling rates against rupee as well as increase in input cost against constant selling price.

Owing to increase in demand for tractors and related agro-implements, inventory of the company increased exorbitantly. Thus, inventory turnover has been historically higher than the industry average. As a result, the operating cycle of MTL has also lengthened over the years under discussion. Though sales/equity and TATO is declining, it fares well than the industry average trend owing to better utilization of assets and equity.

In FY07 however, the efficient production and operation management efforts by MTL pulled down the operating cycle of the company signifying lower time lags and speedier collection of cash against credit sales. TATO and Sales/equity also recovered marginally in FY07 on the back of increased sales of tractors and spare parts.

The main financing of MTL is through long term debt as indicated by increasing long term debt to assets ratio. High advances from customers coupled with amount received from customers for warranty and maintenance services consequently increased the total debt of the company as evident from high debt-equity and debt-asset ratios, which declined in FY07 when the company boosted its liquidity position significantly. Thus, interest coverage ability (TIE Ratio) of the company was fairly high till FY'06 and has dropped recently owing to high level of EBIT depicting high level of income to cover the interest expenses.

EPS is in line with the profit margins of the company. Since MTL imports CKD kits from UK, higher EPS was recorded when Rupee was strong against Pound Sterling along with low steel prices in the international price making imports cheaper. On the contrary, a sharp dip was observed in FY07 owing to strong pound sterling against rupee as well as due to rise in material cost. Overall, the company performed well in terms of its EPS.

DPS has risen over the years while remaining below the industry average. BV per share however declined over the 4 years, as the number of outstanding shares increased.

FUTURE OUTLOOK: High price of oil in the international market is creating inflationary pressure on the economy. As a result, the cost of borrowing has become higher than the preceding years. This together with worldwide shortage of steel is gradually rendering the company inefficient in terms of manufacturing cost.

The dilemma that the industry currently facing is of capacity constraint, with demand outpacing the supply. During H1-FY07, production has declined by 3.4% owing to the capacity restraints. Also, the government has allowed the import of tractors keeping the company at disadvantage.

Nevertheless, MTL is planning to increase the production level to reduce the accumulation of pending orders with the co-operation of vending associates. This will enable timely delivery of the tractors and equipments to the customers along with rise in production level.

Furthermore, MTL offers after sales service to its customers, which will prove to be a formidable barrier against imported products (since foreign dealers don't provide after sales service) and new entrants. Moreover, by implementing strategies such as financial controls, operational efficiencies, and marketing MTL can move forward to mitigate any negative impacts of WTO.