LAHORE: Millat Tractors has notified the Pakistan Stock Exchange (PSX) that it will suspend production activities on Friday 6 January, in perpetuity. Millat has cited a reduced demands for tractors in conjunction with the company’s own cash flow constraints as the reason for its decision.
The build-up to this decision
Millat’s decision comes at the backdrop of the company observing two long spells of non-production days in 2022. Millat had previously halted production from March 7 to March 21, and August 31 to September 23. The company had also declared Friday to be a non-production day in perpetuity from December 16. Cumulatively, Millat had observed 44 calendar days in 2022 as non-production days.
Millat’s troubles
Millat has cited confluence of demand destruction and a liquidity problem as the reason for its decision. Both of the aforementioned facts have been well documented over the course of 2022.
In terms of demand destruction, Millat is currently experiencing the worst start to a fiscal year in the past five years. Five month sales, based on the data provided by the Pakistan Automotive Manufacturers Association, currently stand at 5,800 units. This is a 58% year-on-year decrease from the 13,954 units sold over the same period last year.
In an earlier conversation, Raheel Asghar, CEO Millat Tractors, told Profit, “We (Millat Tractors) have seen a reduction, and so have our competitor (Al-Ghazi). There are a number of factors affecting the market. The most evident one is the flash floods of 2022 that rampaged across Sindh, Balochistan, and lower Punjab and directly hit the purchasing power of farmers.
Asghar’s outlook for the upcoming year is equally pessimistic with him telling Profit “I think it’s going to be a matter of survival. It’s not going to be a good year for us.”
Regarding cash flow constraints, the issue is likely a result of a culmination of various factors as well. The most obvious factor, beyond the immediate drop in sales, is the persistent sales tax issue that Millat and other tractor companies have been at odds with against the Government for the better part of last year. Asghar had previously explained the matter to Profit as such “The government had previously exempted tractors from the sales tax. We were able to obtain refunds from the government for our input costs. We will not receive this refund now, and subsequently we had to increase our prices to cater to this.”
Furthermore, in terms of cash flow constraints, Millat is also currently engaged in a legal dispute with the Federal Tax Ombudsman’s Office whilst dealing with the aforementioned two factors as well.
Can we expect a resumption in activity?
There is no question about whether or not Millat will resume activity. It will. The matter boils down to when. Millat had previously notified the PSX about such a halt in production in March when it observed 17 calendar days worth of non-production days.
Its notification March 4, similar to now, read that it would be ceasing operation in perpetuity. It was then on March 21 that it issued the follow-up notification stating that it will resume operations the next day. Assuming any specific date for Millat to resume production would be incorrect, however, 17 calendar days is a good barometer based on past precedence.
Millat is unlikely to maintain this shutdown for a sustained period because, if nothing else, its closest competitor Al-Ghazi will not be observing any such halt. Millat’s last spell of non-production days from August 31 to September 23 led to Al-Ghazi beating Millat in sales volume for the month of September. Millat is unlikely to want to have this instance repeat itself, and that too for multiple months.
The tractor industry, like the overall automotive market, has struggled in 2022. MIllat’s decision, thus, is understandable. Asghar, however, does believe that the market will improve going forward in 2023. He stated “I think going into next year demand should pick up slightly. It’s not going to be a full recovery but there should be some improvement in the market, especially as we head towards March because that’s when the season is,” when asked about the matter.
