AKD Quotidian about — Tractor Industry: Recommended to the Government

Karachi: Following drastically low sales over the last few months, the tractor industry has urged the GoP to review the existing policies for the tractor industry.

According to AKD Securities, recall that the tractor industry has been witnessing a sharp slowdown in volumes since the beginning of the current fiscal year, mainly on the back of the 16% GST imposition and dampened farmer economics. While GST was imposed in 4QFY11, industry sales volumes declined with a lag due to pre-bookings of tractors even as ZTBL tractor loans remained discontinued. With the onset of FY12 however, surge in urea prices coupled with a steep drop in cotton prices resulted in additional cost to farmers, which added to the burden of higher tractor prices (post 16% GST). Resultantly, tractor sales have declined by a staggering 78%YoY in 2MFYI1. To compound matters, news reports indicate that the ECC is considering allowing import of cars, buses and tractors on lower tariffs. For these reasons, the tractor industry has appealed to the GoP to:

Review the 16% GST decision – The tractor industry has appealed to the Government to remove 16% GST and impose it in three stages (5% GST in the first stage)

Disallow tractor import – At present, less than 10% of the tractor market is served by imported tractors. In this regard, news reports indicate that the ECC is considering allowing tractor imports on lower tariffs. In response, the domestic tractor industry has appealed to the GoP to disallow tractor imports as the local industry is in a position to completely meet domestic tractor demand at competitive prices.

Revive ZTBL loans – A revival of ZTBL loans for purchase of tractors should act as a support system for a weaker rural economy and support recovery of farm incomes.

Revive subsidy schemes – Tractor Subsidy Schemes (Benazir tractor scheme-bk tractors country-wide, Green tractor scheme-10k tractors in Punjab and Sindh Tractor Scheme- 5k tractors in Sindh) have provided strong impetus to tractor sales during the past three years (from -53,203 tractors in FY08 to 69,203 tractors in FY11). In this regard, lower volumes in the current year are partly a result of the absence of these schemes. Considering the recent floods in Sindh, the tractor industry has requested the Government to revive the subsidy activities to flood-affected farmers.

Investment Perspective: Owing to poor sales volumes and strong headwinds, AGTL and MTL have dropped by 12.3%FYTD and 19.2%FYTD, respectively. While it appears that the industry is making efforts to garner GoP support, uncertainty continues to persist. Within this backdrop, AKD Securities advises investors to remain sidelined on the tractor scrips until clarity emerges. AKD Securities is currently in the process of revising AKD Securities’ financial models and shall update investors accordingly.

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