PUNJAB COLLEGE OF COMMERCE

Project Report

Group Members:

Reg. #

Junaid Subhani

L4F14MCOM0017

Muhammad Abubakar Saleem

L4F14MCOM2005

Muhammad Iftikhar

L4F14MCOM0014

Omer Gul

L4F14MCOM0023

Mian Usman

L4F14MCOM0024

Course:
Financial Accounting

Topic:
Millat Tractors

Submitted To:
Prof. Abid Noor

Submission Date:
10/03/2015

Financial Accounting

Page 1

MILLAT TRACTORS LIMITED

History of the Company:
Millat Tractors Limited (MTL) was established in 1964 to introduce and market Massey
Ferguson (MF) Tractors in Pakistan. An assembly plant was set up in 1967 to assemble tractors
imported in semi-knocked down (SKD) condition.
The company was nationalized under Economic Reforms Order in 1972 and started assembling
and marketing tractors on behalf of Pakistan Tractor Corporation (PTC) which was formed by
the Government for import of tractors in SKD condition. In 1980 the Government decided on
indigenization of the tractors and entrusted this task to PTC (Pakistan Tractor Corporation).
PTC transferred this role of indigenization in 1981 to MTL. This was the turning point in the
Companys history and it went about the task methodically and rapidly. The Company undertook
this new role with enthusiasm and in the spirit of national development and proved its
engineering capabilities by surprising the deletion targets set by the Government. Just in one
years time, the company took a giant step towards self-reliance by setting up the first engine
assembly plant in Pakistan.
In 1992, the company was privatized. The employees joined hands and took over the
management by winning an open bid.
To maintain its leadership role in tractor manufacturing in the country, MTL continues to look
toward future, to identify and exploit new opportunities and to consolidate existing ones. The
Tractor Assembly Plant is part of this philosophy. This plant started its production in 1992. The
establishment of this modern plant not only increased production capacity to 16000 tractors per
year on a single shift basis, but also provided a quantum jump to the quality of the assembled
tractors and pushed MTL into ranks of the major tractor manufacturing companies of the World.
The Company made a strategic decision right in the beginning to bring those manufacturing
facilities in-house for which capabilities did not exist in the country and for parts which required
high precision and investment. Therefore, in 1984, sophisticated manufacturing facilities for the
machining of intricate components were set up. These were previously not available in Pakistan.
Currently, critical components like Engine Blocks, Sump, Transmission Case, Axle Housing,
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Hydraulic Lift Cover, Front Axle Support and Centre Housing are all being machined most
successfully in-house at MTL from locally sourced castings.
In 1992, the production of Millat Tractors was just 8,000 units per annum with variety of only 2
main products, now the annual production is reached from 8,000 units to 45,000 units with
variety of 8-different main models. Moreover, the company looks to the future with optimism
and plans to broaden its customer base. Consequently the opportunities are being explored in
multi-application of engines and tractors in areas other than farming sectors. Mass Production of
Generating Sets was started in 1994, while a 3-Ton Fork Lift Truck branded as Millat, based on
TCM technology was launched in the year 2002.
In addition, Millat Tractors Limited has been the regular recipient of the Corporate Excellence
Award of Management Association of Pakistan and the Top Companies Award of Karachi Stock
Exchange, since early eighties. MTLs Annual Report has been acknowledged as the Best Annual
Report by the Institute of Chartered Secretaries and Admin Association of Pakistan for several
years.

1: Technology
2: Environment
3: Innovation
4: Disaster
5: competitor
6: Agriculture sector

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Past Performance of Millat Tractors (2009- 2013):

Profit & Loss Summary

Net sales
Gross profit
Operating profit
Profit before tax
Profit after tax
Earnings before interest,
tax,

depreciation

2013

2012

2011

2010

2009

Rs. in thousand
Rs. in thousand
Rs. in thousand
Rs. in thousand
Rs. in thousand
Rs. in thousand

22,698,651
4,010,267
3,175,819
3,172,972
2,138,646
3,296,625

20,133,130
3,433,817
2,639,248
2,875,345
1,977,618
2,945,723

24,863,264
4,431,963
3,584,625
3,914,284
2,670,736
3,990,563

22,199,909
3,982,800
3,143,484
3,336,621
2,284,498
3,402,644

15,910,619
2,421,765
1,755,736
1,752,332
1,215,120
1,841,478

Rs. in thousand

402,660

366,055

366,055

292,844

234,275

&

amortization (EBITDA)
Balance Sheet
Summary:
Share capital

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General reserves
Property,
plant

Rs. in thousand
& Rs. in thousand

equipment
Noncurrent assets
Current assets
Current liabilities
Net working capital
Long term / deferred
liabilities
Profitability Ratios
Gross profit
Operating profit
Profit before tax
Net profit after tax
EBITDA margin
Operating leverage
Return on equity
Return on capital
employed
Return on assets
Liquidity Ratios
Current
Quick / Acid test
Cash to current liabilities
Cash
flow
from

3,306,590
448,375

3,368,710
415,926

2,766,678
435,516

2,467,776
411,759

2,220,776
405,618

Rs. in thousand
Rs. in thousand
Rs. in thousand
Rs. in thousand
Rs. in thousand

944,871
8,732,156
5,331,414
3,400,742
30,148

834,924
9,038,370
5,098,772
3,939,598
28,530

723,226
7,426,242
3,896,657
3,529,585
36,091

749,411
10,604,724
7,555,574
3,049,150
17,913

698,025
5,679,157
3,360,520
2,318,637
51,437

%
%
%
%
%
%
%
%

17.67
13.99
13.98
9.42
14.52
0.92
44.89
45.38

17.06
13.11
14.28
9.82
14.63
1.40
38.31
38.50

17.83
14.42
15.74
10.74
16.05
1.44
57.41
57.76

17.94
14.16
15.03
10.29
15.33
2.20
54.49
54.82

15.22
11.03
11.01
7.64
11.57
1.35
36.05
36.30

31.34

27.95

45.59

28.36

25.83

Times
Times
Times
Times

1.64 : 1
1.12 : 1
0.39 : 1
0.09 : 1

1.77 : 1
1.17 : 1
0.13 : 1
0.04 : 1

1.88 : 1
1.19 : 1
0.10 : 1
-0.01 : 1

1.39 : 1
1.05 : 1
0.15 : 1
0.19 : 1

1.67 : 1
1.03 : 1
0.30 : 1
-0.01 : 1

Times
Days
Times
Days

6.46
57
32.77
11

5.79
63
68.51
5

7.71
47
78.82
5

7.70
47
76.33
5

6.97
52
138.43
3

Times
Days
Times
Times

7.94
46
2.24
34.79

9.76
37
1.96
34.46

15.60
23
2.90
42.09

20.00
18
1.89
39.14

20.52
18
2.35
31.20

Days

22

31

29

34

37

Rs

53.11

49.11

72.96

62.41

41.49

operations to sales
Activity / Turnover
Ratios
Inventory turnover ratio
No. of Days in Inventory
Debtor turnover ratio
No. of Days in
Receivables
Creditor turnover ratio
No. of Days in Creditors
Total assets turnover ratio
Fixed assets turnover
ratio
Operating cycle
Investment / Market
Ratios
Earnings per share

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(after tax)
Price earning
Dividend yield
Dividend payout

Times
%
ratio %

(after tax)
Dividend cover
Cash Dividend per share
Bonus per share
Market value per share:
Year end
During the year:
Highest
Average
Lowest
Break-up value per share
Capital
Structure

9.88
9.81
103.55

9.83
13.32
132.36

8.25
9.49
65.10

7.70
16.10
86.53

6.73
21.30
91.57

Times
Rs
%

1.02
55.00
19.00

0.83
65.00
-

1.54
47.50
-

1.16
65.00
25.00

1.09
45.00
25.00

Rs

524.99

482.85

601.71

480.31

279.24

Rs
Rs
Rs
Rs

646.00
560.50
475.00
118.31

625.80
487.95
350.09
141.01

610.70
500.35
390.00
127.09

529.25
403.63
278.01
143.16

302.00
211.27
120.54
143.88

0 : 100
52.02

0 : 100
499.76

0 : 100
504.83

0 : 100
395.73

0 : 100
46.28

Ratios :
Debt to Equity ratio
Times
Financial
charges Times
coverage.

Financial Accounting

Page 6

Competitor Analysis:
Ratio Analysis
For the year 2013
Ratios
Liquidity :

Millat Tractors

Al Ghazi Tractors

Current ratios
Quick ratios

1.64 : 1
1.12 : 1

6.09
4.99

Times
Times

17.67
13.99
13.98
9.42
14.52
44.89
31.34

22.34
17.76
21.84
14.81
18.18
16.69
22.16

%
%
%
%
%
%
%

4.45

Times

57

82

Days

11

11

Days

46
2.24

49
0.94

Days
Times

34.79

22.90

Times

22

44

Days

53.11

31.94

Rs,

6.65
11.77
83.74

Times
%
%

Profitability
Ratios:
Gross profit
Operating profit
Profit before tax
Net profit after tax
EBITDA margin
Return on equity
Return on Assets

Activity

Turnover Ratios
Inventory turnover 6.46
ratio
No. of Days in
Inventory
No. of Days in
Receivables
Days in Creditors
Total assets
turnover ratio
Fixed assets
turnover ratio
Operating cycle

Investment

Market Ratios
Earnings per share

(after tax)
Price earning
9.88
Dividend yield
9.81
Dividend
payout 103.55
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ratio (after tax)

Dividend cover
1.02
Bonus per share
19.00
Market value per
share:
Year end
During the year:
Highest
Lowest

1.19
15.00

Times
Rs.

524.99

212.43

Rs.

646.00
475.00

246.73
193.89

Rs.
Rs.

0 : 100
52.02

1.01
40.69

Times
Times

Capital
Structure
Ratios:
Debt to Equity ratio
Financial charges
coverage

Trend of Inventory:
1: Inventry turnover
2: inventory Conversion period
Owing to increase in demand for tractors and related agro-implements, inventory of the company
increased exorbitantly. Thus, inventory turnover has been historically higher than the industry
average. As a result, the operating cycle of MTL has also lengthened over the years under
discussion. However, one can see a reversal in the previous trends with ITO reducing to industry
level thus bringing the overall operating cycle in line with the industry trend. This improvement
can be mainly attributed to the contracts for supply of spare parts of Millat generating sets and
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forklift trucks to institutions. The same trend continued in the following years. This is
encouraging given the depressing financial recession that had plagued the economy and posed to
penetrate in this sector.
The inventory turnover of Millat Tractors at 57 days is higher than the industry average of 33.01
days and that of al ghazi is 82 days. This indicates that inventory management at Millat Tractors
is poorer, thus requiring more number of days to sell the entire inventory stock on hand.
However, this can be expected with Millat Tractors' approach of meeting the unmet demand for
locally manufactured tractors. The day sales outstanding for Millat Tractors is also higher at 7.37
days compared to 6.87 days for the industry, due to the higher trade debts of Rs 347 million fort
Millat, compared to Rs 225 million for Al-Ghazi. This implies poorer receivables management at
Millat, although the higher receivables are to be anticipated in line with Millat's higher sales.
Overall, the operating cycle at Millat was recorded at 22 days, compared to 44 days for the
industry.

Cost Flow Assumption:

The FIFO, or First in First Out, Inventory cost flow assumption would be beneficial for the
company. FIFO helps prevent obsolete inventory by using the inventory first received before
using newer inventory .This system of inventory costing assumes that the first costs to enter
inventory will be the first costs to be liquidated from inventory. This mirrors the business process
of rotating stock. When new items arrive, they are put on the back of the shelf to encourage
customers to buy the oldest items first. I think this suggestion will work.

Hypothecation:
Borrowing costs are recognized as an expense in the period in which these are incurred except to
the extent of borrowing costs that are directly attributable to the acquisition, construction or
production of a qualifying asset. Such borrowing costs are capitalized as part of the cost of that
asset up to the date of its commissioning.

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Short term running finances are availed from various banks against aggregate sanctioned limit of
Rs. 4,414,000 thousand for the 2nd quarter (30 June 2013: Rs. 1,990,000 thousand). These
facilities have various maturity dates up to 31 October 2014 and renewable on the date of
maturity. These facilities carry mark-up rates ranging from one month KIBOR to six months
KIBOR plus 25 to 40 basis points (30 June 2013: one month KIBOR to six months KIBOR plus
25 to 40 basis points) per annum. These facilities along with import credit facility are secured by
way of first pari passu charge for Rs. 5,320,000 thousand on fixed assets and first joint pari passu
hypothecation charge of Rs. 5,890,000 thousand on stocks including but not limited to raw
materials, goods in process and finished goods of the Company. 6.2 The Company also has
aggregate sanctioned import credit facilities negotiated with various banks amount to Rs.
2,550,000 thousand (30 June 2013: Rs. 2,550,000 thousand). These facilities carry mark-up rates
ranging from one month KIBOR to six months KIBOR plus 40 to 50 basis points (30 June 2013:
one month KIBOR to six months KIBOR plus 125 to 150 basis points) per annum. These
available facilities are secured by way of joint pari passu, ranking hypothecation charge over
present and future current assets of the Company.
Short term borrowings are available from various banks against aggregate sanctioned limit of Rs.
2,074,000 thousand for the whole year (2012: Rs. 1,799,000 thousand). The rates of mark up
range between KIBOR plus 0.25% to KIBOR plus 0.5% (2012: KIBOR plus 0.2% to KIBOR
plus 0.5%) per annum.
The Company has facilities for opening of letters of credit and guarantees aggregating to Rs.
2,674,000 thousand (2012: Rs. 2,470,000 thousand) out of which Rs. 941,800 thousand (2012:
Rs. 1,104,780 thousand) remained unutilized at the end of the year.
These facilities are secured by pari passu hypothecation charge over current assets and book
debts of the Company, lien over import documents and counter guarantees of the Company.

Impact on Working Capital:

Cash flow is the lifeblood of a small business, and managing it can be a challenge, no matter how
healthy the business. When vendors are taking their time to pay you, and unexpected expenses
crop up, having working capital on hand is critical. Sometimes the need for working capital is
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expected. Businesses that do not have reliable and constant daily inventory turnover, such as
seasonal businesses and heavy equipment businesses, know that cash flow will often be short and
can plan ahead. But more often business owners of all industries run into unexpected situations
where cash on hand is a lifesaver.
Inventory is a liquid asset (hence it being included in the current asset group) in accounting
terms. Companies can usually sell this inventory fairly quickly in order to pay bills and increase
cash to pay other operating bills. Most companies use accounts payable to pay for new inventory
purchases. Therefore, inventory affects working capital on both sides: asset and liability.
Companies are typically unable to purchase large amounts of inventory in order to improve their
working capital position. This metric ensures the company cannot mislead business stakeholders
through simple transactions.
In addition to analyzing the average number of days it takes to make a product (inventory days)
and collect on an account (accounts receivable days) vs. the number of days financed by
accounts payable, the operating cycle analysis provides one other important analysis. You can see
that working capital has a direct impact on cash flow in a business. Since cash flow is the name
of the game for all business owners, a good understanding of working capital is imperative to
making any venture successful.

Financial Accounting

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