AKD Quotidian about — MTL: FY11 Result Preview

Karachi: The Board of Directors of Millat Tractors Limited (MIL) is scheduled to consider its full year FY11 financial results tomorrow (August 16,12).

According to AKD Securities expects the company to report NPAT of PkR2.5bn in the review period against NPAT of PkR23bn in the previous year, a growth of 9%YoY. The result translates into EPS of PkR68.2 in FY11 against EPS of PkR62.4 in FY10. Growth is expected to stem from both higher volumes (up 5%YoY) and higher prices (up 7%Y0Y). Rising cost environment should contain the gross margin at 174% in FY11 (against 17.3% in FY10). AKD Securities also expects the company to pay a cash dividend of PkR32.O/share in 2HFY11 (Note that MTL has already paid a DPS of PkR32.5 in 1HFY11). Sequentially, the company is expected to post NPAT of PkR689.2mn (EPS: PkR18.8) in 4QFY11 against NPAT of PkR689.2mn (EPS: PkR16.9) in the previous quarter, a growth of 11%QoQ. The overall tractor volumes declined by only 3%YoY in FY11 despite Aug’10 floods, indicating increasing mechanization in the country and improved farmer dynamics due to high cotton prices. FY12F however, should witness serious setbacks in the tractor industry, given increasing fertilizer (gas shortage) and tractor (16% GST levy) prices. Though news reports indicate discussions in the government circles regarding revoke of GST on tractors, AKD Securities advises investors to remain a little sideline from tractor scrips, till clarity emerges. At current price level, AKD Securities hove cc Accumulate stance on MTL, which trade at a PPR of 7.51x cod offers an upside of 15.1% to AKD Securities’ target price of PKR644.5/share.

Sequential Earnings to grow by 11%QoQ: MTL is expected to post NPAT of PkR689.2mri in 4QFY1I against NPAT of PkR618.Smn in the previous quarter, a growth of 11%QoQ. The result translates into EPS of PkR18.8 in the review period against EPS of PkR16.9 in 3QFY11 – Growth is expected to come from higher volumes (up 34%YoY to stand 12,298 units) despite the GST levy (likely due to high caftan prices resulting in increasing farm income). Margins are however expected to remain constant at 13.9% (gross margin) and 17.9% (operating margin).

GST Levy & tractor demand: The 16% GST levy coupled with higher fertilizer prices and declining cotton prices have led to a substantial decline in tractor volumes, with the onset of FY12. Tractor sales declined by 81%YoY in 1MFY11 to stand at 1,036 units. In this regard, MTL recorded a sales decline of 73%YoY (to 727 units), while AGTL sold 309 units (down 89%YoY) in Jul11. Note that production also declined by 70%YoY to stand at 1,732 units. A potential government decision to allow free import of cars & tractors may further supress tractor demand. Though news reports indicate discussions in the government circles regarding revoke of GST on tractors, AKD Securities advises investors to remain a little sideline from tractor scrips, till clarity emerges.