Tractor Sales Set to Normalize After SRO Rescission

ISLAMABAD: The long-standing demand of the tractor industry has been met as the Federal Board of Revenue (FBR) has rescinded SRO 563(1)/2022. Additionally, the sales tax has been increased to 14% to better align with manufacturers’ input-output tax adjustments, minimizing refund backlogs.

Previously, the SRO restricted sales by requiring tractor manufacturers to sell only to legitimate farmers with verified landholding proof from provincial authorities. Manufacturers faced challenges in collecting and verifying these records, leading to stuck refund claims. In response, they urged the government to remove the SRO and address refund issues.Pak and Belarus discussed different joint venture options to set up tractor plant

Following these changes, tractor sales are expected to rebound, recovering from a 57% year-on-year decline in 1QFY25, where only 5,206 units were sold.

Punjab Government Green Tractor Scheme: The government plans to subsidize Rs1 million on each of the 9,500 tractors. Balloting for the scheme is expected in the coming days, and manufacturers anticipate dispatching all tractors by December 2024 or January 2025.

Millat Tractors (MTL) Volumetric Sales Revised Up: Based on the recent developments and the tractor scheme, Millat Tractors’ sales forecast has been revised to 23,566 units for FY25 and 31,500 for FY26, marking a 43-62% increase from previous estimates. MTL is expected to supply around 6,000 units under the scheme, given its market share of 60-65%. However, FY25 sales are still projected to be 26% lower than FY24, largely due to lower wheat prices and a poor cotton crop, which may impact farmers’ purchasing power.

Payout Resumption Expected After Amalgamation: Millat Tractors skipped its FY24 dividend due to the pending amalgamation with Millat Equipment, effective from January 2024. Payout is expected to resume after approval.

Earnings Growth Forecast: MTL’s earnings are projected to grow by 50% year-on-year in FY26 after a 24% decline in FY25. Earnings are estimated at Rs39.5 per share for FY25 and Rs59.4 per share for FY26. With an 85% payout ratio, expected dividends are Rs34 per share in FY25 and Rs50 per share in FY26, offering a dividend yield of 6% and 9%, respectively.

Valuation: The BUY call on MTL is maintained, with a December 2025 DCF-based target price of Rs630 per share, indicating a total return of 21%, including an 8% dividend yield.