Jute goods: THAL LIMITED - Analysis of Financial Statements Financial Year 2003 - Financial Year 2007

Thal Limited (formerly Thal Jute Mills Limited) enjoys the distinction of being the pioneer industrial project of the House of Habib. The company was incorporated on January 31, 1966 as a public limited company by shares and is listed on the Karachi and Lahore stock exchanges.
Its name has changed from Thal Jute Mills Limited to Thal Limited and was approved by the SECP in February 2004. The company has a sound financial base. Its authorized capital is Rs 100 million and the paid up capital is Rs 70 million and the free reserve is Rs 500 million. Thal commands a market share of about 26% of the total production of 12 jute mills operating in the country.
The company is engaged in manufacture of jute goods and assembly and making of engineering goods consisting of auto air conditioners, wire harness and heater blowers. There was an amalgamation of Khyber Papers (Pvt) Ltd and Pakistan Papersack Corporation Ltd with Thal Limited, becoming effective from July 1, 2005.
RECENT RESULTS - H108 The sales turnover for the half-year ended December 31, 2007 was Rs 3.318 billion as against Rs 3.031 billion in the same period last year (SPLY) reflecting a growth of 9.5%. The profit before tax increased to Rs 521.47 million compared to Rs 509.08 million for the SPLY.
The profit after tax also registered an increase to Rs 382.79 million compared to Rs 358.46 million in the corresponding period last year. The basic and diluted earning per share was Rs 12.57 in the current half year as against Rs 11.77 per share in the SPLY, thus showing an improvement of 6.7%.
ENGINEERING OPERATIONS The sales turnover in the engineering operations went up from Rs 1.847 billion to Rs 1.913 billion, a marginal growth of 3.53%. Though the division sold more than last year, it faced the challenges in the closing months of the period, as the sales of auto-makers declined drastically.
A plant for manufacture of wire harnesses is being built at Sundar Industrial Estate Lahore, in closed proximity of Honda Atlas Cars Pakistan Limited for supply to them and the other potential customers, at an estimated cost of Rs 91 million. The commercial production will start in next year.
BUILDING MATERIAL AND ALLIED PRODUCTS SEGMENTThe building material and allied products segment accomplished a turnover of Rs 1.405 billion during the half year as against Rs 1.183 billion thus reflecting a growth of 18.67%. The segment result reflected an improvement of 7% from Rs 117.3 million to Rs 125.3 million.
JUTE OPERATIONS The production of jute goods was 14,084 metric tons during the half-year showing an increase of 7% compared to 13,118 metric tons in the SPLY. During the year we were able to export jute goods valuing Rs 269 million (US $4.41 million) compared to Rs 181 million (US $3.02 million) registering an increase of 49% over the corresponding period last year.
PAPERSACK OPERATIONS During the period under review the papersack operations kept pace with enhanced demand of sacks by the cement industry and was able to grow its output from 43.9 million to 48.6 million sacks. The increasing cost of imported raw material coupled with depreciation of the rupee against the dollar and euro is however expected to impact the profitability of the division. In response, the management has undertaken measures to keep costs in control and is hopeful of maintaining the margins in the second half of the year.
LAMINATES OPERATIONS During the period under review, the operations faced several major challenges as the construction activities have slowed down. The orders from overseas customers have also been slow resulting reduction in export sales to Rs 38 million compared to Rs 44 million in the previous half year.
THE JUTE DIVISION The jute mill is located at D.G. Khan Road, Muzaffargarh, Pakistan and is engaged in the manufacturing of A. twill sacks, B. twill sacks, coffee sacks, sugar sacks, heavy cees, light cees, hessian cloth, hessian bags (ordinary/natural white), jute yarn and twine used mainly for packing of wheat, rice, cotton, etc.
THE ENGINEERING DIVISION The company diversified its business activity into the assembly and manufacturing of auto air conditioners in 1995-96 by signing a technical license agreement with Denso Corporation, Japan. The engineering division accomplished the deletion target of 50% set by the Ministry of Industries, Government of Pakistan. The plant has a production capacity of 40,000 units per annum on single shift basis. The division is supplying air conditioners to the auto manufacturers ie Indus Motor Company Ltd and Pak Suzuki Motor Co Ltd.
Profitability of Thal Limited has remained consistent throughout the five years under consideration. This can be attributed to the increasing sales trend in both the engineering and the jute divisions. The sales turnover of the jute division has consistently shown an increase, as the company has further explored new markets of Egypt, Sri Lanka, Switzerland and USA in addition to its previous established markets.
The cost of manufacturing for the jute division has also increased, primarily due to an increase in the cost of raw jute, jute batching oil and increase in the minimum wages announced by the government in the Federal Budget. The jute industry is labour-intensive and wages are 20% to 30% of the total cost of manufacture. Increase in wages adversely affects the operating results. However, due to an impressive maintenance of the sales turnover, the effect of high cost of manufacturing was largely mitigated in the profitability results.
As far as the engineering operations are concerned, the sales turnover went up during the years under review due to continued upsurge in the automotive market where the output of cars and LCVs in the industry went up to 151,000 numbers from 112,000 numbers. The sales volume of air conditioners also went up tremendously, being exhibited in the higher profitability results by the company.
Both total assets and the total equity have been rising steadily over the years. In the last few years, the increase in assets can mainly be attributed to the merger activity with the KPL and the PPCL. The equity base of the company has increased largely due to an increase in the reserves, which have shown a rising trend over the years, particularly in 2006.
The company has maintained a commendable profit margin backed by a rise in assets and consequently, the return on assets has been fairly consistent through out the five years being discussed. However, the return on equity has been declining over the years as the sharp rise in equity over the years was not backed up by an equivalent or greater rise in the net profit of the company, hence exhibiting a declining return on equity. The company has witnessed a rising trend in its liquidity. The current ratio has been way above 1.00 over the years, exceeding 4 in the year 2007.
Both, current assets and current liabilities have increased over the years, however, the increase in current assets, mainly due to increasing cash balances, trade debts, short term deposits and stock in trade, is proportionately greater than the increase in the current liabilities brought about by a rise in short-term borrowing and creditors. Consequently, the overall liquidity of the company has risen.
The operating cycle of the company depicts an improving trend. Initially the rising days sales outstanding indicated the company's needs to reevaluate its credit policies as its creditors were taking a lot of time in returning back their liabilities. Similarly, the erratic trend in the inventory turnover in days shows that the company is facing difficulty in managing its inventories well and consequently, it's facing difficulties in converting its inventories to receivables. Overall, the operating cycle of Thal Limited has improved in FY07, showing that the company has worked up on its asset management considerably.
The company has maintained a praiseworthy debt-management profile. The total debt to assets ratio has been declining as has the long-term debts to equity ratio. This is because even though the total debts of the company have been rising, the increase in debts, are not proportionately greater than the increase in assets and equity. Consequently, the company needs to be lauded on its efficient debt management even though its asset base has been rising consistently.
The Times Interest Earned (TIE) ratio of the company faced a decline in 2005. This is because the financial expenses for the year under review escalated to Rs 15.869 million from Rs 8.550 million in 2004, due mainly to an increase in the rate of mark-up by the financial institutions and funds tied up in increased inventory and receivables. The loss on account of foreign exchange amounting to Rs 2.261 million has also been classified under financial expenses under the new IAS requirements. However, even in 2005 the TIE was pretty high at 38.28.
The TIE improved to a swooping 68.57 in 2006, mainly because of a decline in financial costs to Rs 13.920 million while the operating profit of the company increased around Rs 954.5 million. However, it again declined in FY07 due to higher financial costs. Over all, the five years under review, the TIE has remained above 37.00, a fairly impressive figure for a company that also faces high costs of manufacturing.
With a rising trend in the average market price, the book value and the earnings per share, the company has been maintaining a commendable market worth. The rising market prices, quite high at above Rs 150 during the last two years, indicate investor's great confidence in the company. The recent merger and the anticipated benefits to the company's financial results can also be a reason for the rise in the average market prices of the company.
The book value has also increased tremendously over the years (though it declined in FY07), mainly because of the total equity base of Thal Limited increased due to an increase in its reserves. Similarly, the earnings per share also increased as the net profit increased consistently over the four years under review.
FUTURE OUTLOOKThe growth in the auto sector seems to have slowed down and orders and forecast from automobile manufacturers for the second half of the fiscal year have plateaued. Thal Limited's management expects a healthier demand for sacking from the government departments and corporations due to high targets fixed for procurement of wheat in view of an improved wheat crop.
The planned expansion in the indigenous cement industry has gradually been coming on line. The Government of Pakistan's planned PSDP (Public Sector Development Programme) and construction work at home coupled with rebuilding efforts in the neighboring counties is expected to create higher demand for cement and thus for paper sacks. The growth in the cement sector is expected to yield higher capacity utilization and improved profitability for PPD.
Overall, the company has been performing quite well in terms of its profitability, debt management and liquidity. It needs to however, watch over its asset management as its operating cycle has risen over the years. The recent merger with the Khyber Papers Ltd and the Pakistan Papersack Corporation Ltd has helped to improve the market worth of the company, and overall, the improved financial performance of the company is reflected in the consistently improving EPS of the company.

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Thal Limited - Financials
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INCOME STATEMENT                 2003        2004        2005        2006        2007
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Turnover                    2,097,287   2,677,560   3,516,827   5,907,105   6,826,389
Gross Profit                  494,045     532,512     714,522   1,173,150   1,308,496
Operating Profit              421,015     457,165     607,411     954,477   1,190,088
Profit Before Tax             394,704     445,667     596,374     963,538   1,078,935
Net Profit                    265,179     314,329     411,756     663,173     740,094
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BALANCE SHEET                    2003        2004        2005        2006        2007
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Total Equity                  569,554     804,986   1,195,027   2,431,827   3,033,115
Current Liabilities           425,897     514,095     442,555     756,885     640,616
Non-current Liabilities        28,216      15,391      14,511      24,771      27,351
Current Assets                848,589   1,158,617   1,459,697   2,678,121   3,018,705
Non-current Assets            175,078     175,855     192,396     535,362     682,377
Total Assets                1,023,667   1,334,472   1,652,093   3,213,483   3,701,082
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LIQUIDITY                        2003        2004        2005        2006        2007
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Current Ratio                    1.99        2.25         3.3        3.54        4.71
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ASSET MANAGEMENT                 2003        2004        2005        2006        2007
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Inventory Turnover              87.78      105.03       90.88      101.84          81
Days Sales Outstanding          18.44        25.2       39.27        37.4          27
Operating Cycle                106.22      130.23      130.15      139.23         108
Total Asset Turnover             2.05        2.01        2.13        1.84        1.84
Sales/Equity                     3.68        3.33        2.94        2.43        2.25
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DEBT MANAGEMENT                  2003        2004        2005        2006        2007
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Debt to Asset Ratio              0.44        0.40        0.28        0.24        0.18
Debt to Equity Ratio             0.80        0.66        0.38        0.32        0.22
Long Term Debt to Equity         0.05        0.02        0.01        0.01        0.01
Times Interest Earned              42        55.6       38.28       68.57       37.83
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PROFITABILITY                    2003        2004        2005        2006        2007
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Gross Profit Margin               24%         20%         20%         20%         19%
Profit Margin                     13%         12%         12%         11%         11%
Return on Assets                  26%         24%         25%         21%         20%
Return on Equity                  47%         39%         34%         27%         24%
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MARKET VALUE                     2003        2004        2005        2006        2007
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Book Value                       8.19       11.57       17.18       34.96       25.90
EPS                             19.06       22.59        29.6       28.31        31.6
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COURTESY: Economics and Finance Department, Institute of Business Administration, Karachi, prepared this analytical report for Business Recorder.
DISCLAIMER: No reliance should be placed on the [above information] by any one for making any financial, investment and business decision. The [above information] is general in nature and has not been prepared for any specific decision making process. [The newspaper] has not independently verified all of the [above information] and has relied on sources that have been deemed reliable in the past. Accordingly, the newspaper or any its staff or sources of information do not bear any liability or responsibility of any consequences for decisions or actions based on the [above information].