Baluchistan Wheels Limited

Baluchistan Wheels Limited (PSX: BWHL) was set up in 1980 with technical collaboration of GKN Sankey Limited UK. Located in Hub, Baluchistan, the company manufactures and markets automotive wheel rims for trucks, buses, tractors, cars and mini commercial vehicles.

Shareholding pattern

As at June 30, 2020, close to 53 percent shares were held by the sponsors, directors, their spouse and minor children. Of this, a major part was held by one of the executive directors, Mr. Muhammad Siddique Misri. Over 14 percent shares were held under the “others” category, followed by 12.4 percent shares in banks, DFIs, and NBFIs. The local general public held 15 percent shares of the company while the remaining roughly 6 percent shares were with the rest of the shareholder categories.

Historical operational performance

Baluchistan Wheels Limited has mostly seen a rising topline, except a few years when it contracted. Profit margins, on the other hand, have been fluctuating over the years, witnessing a declining trend after reaching a peak in FY16.

In FY17, topline growth, at 4.2 percent, slowed down relative to that seen in the previous two years. The slowdown in growth was due to the completion of the Punjab Government’s Apna Rozgar Self-employment scheme. This is also reflected in the lower national production of passenger cars at 186,936 units, compared to 209,740 units in FY16. The 4 percent growth in sales was largely derived from sales of truck/bus and tractor wheels due to the rising demand under the China Pakistan Economic Corridor (CPEC). The cost of production, however, grew to consume over 80 percent of revenue, compared to over 74 percent in FY16. The rise was attributed to increase in imported steel prices, in addition to lower production which meant poor absorption of fixed costs. Thus, gross margin was recorded at a notably lower 19.5 percent; net margin, although lower at 8.2 percent, was somewhat supported by a lower tax expense.

Topline growth was in double digits again, at nearly 23 percent, in FY18. Auto sales increased on the back of low interest rates, in addition to the rising popularity of ride-sharing apps, and the introduction of new models like Civic, BRV, Fortuner and Cultus, particularly the latter for the price-conscious customer. Trucks/buses and tractors also saw growth due to CPEC and revival of the crop sector. Cost of production, on the other hand, continued to consume a larger in revenue, at nearly 86 percent, due to rise in imported steel prices, that was further worsened due to the currency devaluation. Therefore, gross margin further reduced to 14 percent; with zero support from other income, this also trickled down to the bottomline, with net margin recorded at 4.7 percent for the year.

The company witnessed one of the highest contractions in revenue since FY14, at 15.7 percent in FY19. Sales of truck/bus wheels and tractor wheels were lower year on year in value terms, due to a slowdown in CPEC and a low production of cotton crop. National level sales of passenger cars were also lower due to an increase in prices, rupee depreciation, high interest rates and rising petroleum prices. Cost of production was slightly lower at 84.5 percent of revenue, raising gross margin marginally to 15.5 percent. Net margin, on the other hand, was adversely, although only slightly, affected by the finance cost that was recorded at Rs 7 million, compared to previous year’s Rs 2 million; thus, net margin stood at a slightly lower 4.5 percent.

In FY20, the company saw the highest contraction in revenue, by over 42 percent; it fell below Rs 1 billion, with sales of wheels of all segments- cars, trucks, buses, and tractors reducing. This was largely attributed to the Covid-19 development; production was halted, and sales were already down due to high interest rates, restriction on non-filers, etc.; the situation was further aggravated by the outbreak of the Covid-19 pandemic. Production cost rose to 87 percent, bringing gross margin down to 12.9 percent. Despite the growth in other income, the rise in expenses as a share of revenue, brought net margin down to an all-time low of 2 percent for the year.

Quarterly results and future outlook

The first quarter of FY21 saw topline lower year on year by over 20 percent. This was due to a decline in sales of car wheels that offset the increase seen in sales of truck/bus wheels and tractor wheels. Production cost also made a larger share in revenue that reduced gross margin to 14.4 percent in 1QFY21. This also trickled down to the bottomline, with net margin recorded at 2.8 percent compared to 6 percent in 1QFY20.

The second quarter of FY21 saw revenue higher by 63 percent year on year. This was attributed to the increase in sale of truck/bus and tractor wheels, while car sales continued to decline. Production cost was considerably lower in 2QFY21, that helped to improve gross margin year on year. With some support also coming from other income, net margin was improved at 5.6 percent, compared to the loss of Rs 8.7 billion in 2QFY20.

Revenue nearly doubled year on year in the third quarter of FY21. This was due to the increase in truck/bus and tractor wheels, with the latter alone posting a sales revenue of nearly Rs 446 million. production cost, however, was higher year on year at over 87 percent, keeping gross margin lower. This also reflected in the net margin. Cumulatively, while gross margin in 9MFY20 was better, net margin of 9MFY21 was better due to support from other income.

The auto industry has seen better performance as economic activity increased. The increase in auto financing and better prices of agricultural products have also encouraged new vehicles buyers.