AL-GHAZI TRACTORS LIMITED

MARIAM NASIR
Manager Research, PAGE
Jan 14 - 20, 2008

INTRODUCTION

Al-Ghazi Tractors Limited was incorporated in 1983, as a culmination of the then government's desire to bring in the private sector to join hands with the public sector as public-private enterprise - under a seven year management contract to the private shareholders. At the end of seven years, the government once again took over the management control of AGTL in 1990. In 1991 the project was offered for privatization, and acquired by Al-Futtaim Group of Dubai who took over the management control of AGTL in December 1991. 50.02% shares of the company are held by Al-Futtaim Industries Co. LLC and 43.17% shares are held by CNH Global NV, with whom Al-Ghazi Tractors Limited has signed an Industrial Collaboration Agreement for manufacture of New Holland brand tractors. The Agreement is valid till April 2016. The company is quoted on Karachi and Lahore Stock Exchanges. The company is engaged in the manufacture and sale of agricultural tractors, implements and spare parts. The company employs a work force of more than 400 hundred personnel's all over Pakistan.

PLANT

The AGTL plant is located in Dera Ghazi Khan - 100 kms from Multan and some 800 kms from Karachi. Built to specifications and standards of Fiat / New Holland - the world's No. 1 tractor manufacturer - the plant is a hallmark of engineering dynamics. With expansions carried out in 2005, the plant is now capable of producing 30,000+ tractors per year in a single shift - the most enduring competitive edge being the quality of our tractors, which are robust and sturdy and carry a local content as high as 83%.

PRODUCT PRICES

There are four models of tractors manufactured by Al-Ghazi that include: GHAZI, 480s, 640 and 640s. All models share the exclusive combination of performance, flexibility and safety that has become our hallmark. Prices of all these products have been kept constant since the year 1998. Price ranges between Rs.320, 000 to Rs.469, 000. The company this year also launched a new model. The company had been holding back the launch of the model as it wanted the government to increase in the fixed prices. Functions were held all over Pakistan to detail out the features of the new product.

FINANCIAL PERFORMANCE

Sales revenue of the company rose from Rs.6.56bn to Rs.6.65bn on account of increase in sales volume as the prices has remained unchanged since 1998. The company has many times strived to persuade the government over increase in prices but it hasn't resulted so far. Government is not raising the prices of the tractors as it is essential machinery for running the agricultural activity smoothly. At times government also imports tractors which are zero rated hence facilitating the farmers over more cost reduction. Cost of the company rose in same proportion of the sales and managed to keep the gross margins static at 18%. Distribution expense of the company rose by 7% which general and administrative expense rose by 3% which again kept the operating margins static at 16.5%. Other income earned by the company over return on cash balances and better treasury management techniques rose by a percent to Rs.426m as against Rs.421m in the same period last year. Financial charges on the other hand rose by 21% but in rupee terms the amount was negligible. As a result the profit before tax rose by a percent while a decline in the taxation expense rose the profit after tax amount by 4% to Rs.945m (EPS: Rs.22.02) as against Rs.905m (EPS: Rs.21.07) in the same period last year. Net margins of the company rose from 13.8% to 14.2% during the comparable period.

JAN-SEPT

9M/CY06

9M/CY07

CHG %

Net Sales Revenue

6,565

6,650

1%

Cost of Sales

5,365

5,436

1%

Gross Profit

1,200

1,213

1%

Distribution Expense

50

53

7%

Administration & Genral Expense

62

64

3%

Operating Profit

1,088

1,097

1%

Other Income

421

426

1%

Other Operating Expenses

104

105

1%

Finance Cost

2

3

21%

Profit Before Taxation

1,403

1,414

1%

Taxation

498

469

-6%

Profit After Taxation

905

945

4%

EPS (Rs.) Diluted

21.07

22.02

4%

Gross Margins (%)

18.3%

18.2%

-

Operating Margin (%)

16.6%

16.5%

-

Net Margin (%)

13.8%

14.2%

-

PERFORMANCE DURING THE 3Q/CY07

During the third quarter of the last calendar year the performance of the company remained under par as the sales revenue declined which trickled down to the profits. While the company continues to strive to deliver progressing results, shortages of raw materials and disruptive rains in July and August curtailed the pace of desired production and sales. 5738 tractors were sold in the third quarter, thus bringing the total sales for the three quarters of the year 2007 to 19,124 compared with 19,010 sold in the similar period last year. Sales revenue declined from Rs.2.2bn to Rs.1.96bn in the current quarter. Support from the other income factor of the company also reduced as the company only managed to earn Rs.131m as against Rs.143m in the same period last year. On the while profit earned during the quarter declined by 15% to Rs.414m (EPS: Rs.6.34) as against Rs.486m (EPS: Rs.7.23) in the same period last year.

FUTURE OUTLOOK

During the past budget government imposed 1% Special Excise Duty on sales of tractors effective from 1st September 2007. This was subsequently withdrawn, however anomaly was created whereby local components being produced from local vendors continue to attract same surcharge. If this continues to go on the company would undergo an increase in production cost and hence reduction in margins due to static prices. However the outlook of the company continues to remain strong for both the customers as well as the stake holders. The company has remained one of the highest dividend players in the industry. The company would continue to give shareholders the worth of the investment in the company.