Pakistan Tractors - On the cusp of a sales turnaround amid agri-upswing; OW -Initiating Coverage
- We initiate coverage on the Pakistan Tractors space with an Overweight stance; we have a Buy rating on Millat Tractors (MTL; TP PkR626/sh) and are Neutral on Al Ghazi Tractors (AGTL; TP PkR448/sh). These two companies practically encapsulate the entire domestic market (70k unit pa. industry at peak); a number which truly stands out given there are over twenty tractor manufacturers in India (500k unit pa. market).
- The Pakistan Tractor industry has endured tough times in the last 5yrs on weak Agriculture growth (FY16: -0.2%) and an unstable taxation regime. We now see a marked turnaround in fortunes on pickup in farmer incomes and favorable GoP policies ahead of 2018 elections (e.g. recent GST reduction on Tractors), which can accelerate mechanization (1.4hp/ha in Pakistan vs. 2.4xhp/ha in India).
- With incumbents expected to retain near-monopolistic pricing power, EBITDA margins should stay elevated over the medium-term (MTL: 15%, AGTL: 22%). This means demand is the primary growth driver where we see 3yr sales/profit CAGR of c.20%. This blend of growth and dividends (D/Y: 9%) can unlock further price performance.
Millat Tractors is engaged in the assembly and manufacture of agricultural and industrial tractors, implements and multi-application equipments including diesel generating sets, forklift trucks, prime movers and other related products. Co. is organized into three business units: the Tractor segment, which deals with assembling and manufacturing of agricultural tractors, implements and multi-application products; the Equipment and Parts segment which is engaged in the business of manufacturing of automotive, agricultural and industrial vehicles parts and components; and the Castings segment, which is engaged in manufacturing of castings for tractors and automotive parts.
Intermarket Securities Limited (IMS) is a full service corporate brokerage firm based in Karachi, Pakistan. We service both domestic and international clients. IMS was ranked #2 Best Local Brokerage and #3 Best for Overall Country Research for 2016 by AsiaMoney.
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