By: BMA Capital Management Limited
We revisit our investment case on Pakistan Tractors, lowering our estimates based on a steep decline in volumetric sales of the industry owing to i) initial delay and eventual shelving (as per the newsflow) of provincial tractor scheme and ii) overall downtrend in rural economics. As such, near term domestic demand outlook remains bleak for the industry. For FY16/CY16, we cut our sales volumes estimates for MTL/AGTL by 13.3k/4.4k units to 16.2k/14.6k tractors, with the exponential decline being accounted for by the shelving of tractor scheme. Furthermore, we have revised down on our MTL volumetric sales assumptions by 16%, 11% and 8% for FY17, FY18 and beyond, respectively; likewise, we have downward revised our AGTL volumetric sales projections by 17%, 14% and 11% for CY17, CY18 and beyond, respectively. The subdued volumetric sales trend during the recent months has kept the sector’s price performance under pressure while near term upside is likely to remain limited as well. However, long term prospects of Tractors industry continue to be attractive. The aforesaid tweaking in our estimates has led to revision in our TP to PKR621 (upside 25%) for MTL and PKR486 (upside 26%) for AGTL.
Fortunes dwindling on unfulfilled schemes: The provincial governments of both Punjab and Sindh announced tractor schemes in the FY16 Budget, aiming to distribute 25,000 and 29,089 tractor units, respectively, on subsidized rates. However, the delay in implementation of provincial tractor schemes led the buyer to defer purchases, hampering demand. To put things in perspective, AGTL and MTL sold only 4.0k and 7.9k tractor units during 6MFY16, down 48%YoY and 38%YoY, respectively, from 7.7k and 12.8k tractors sold during 6MFY15 period. The apparent shelving of provincial tractor scheme eventually, as per the newsflow, depicts a bleak outlook for the sector sales volumes in the near term.