Baluchistan Wheels Limited

Baluchistan Wheels Limited (PSX: BHWL) is a wheel manufacturing company in the country producing steel wheels for the automobile sector, including passenger cars, commercial vehicles and agriculture tractors. The company was setup in 1980 and had a technical collaboration with GKN Sankey Limited of United Kingdom. The company is a member of European Tyre & Rim technical Organization (ETRTO) while its quality management system is certified for ISO-9002 by AIB Vincotte of Belgium.
The company's plant has a single shift capacity of 850,000 wheels and up till FY16 was operating at more than 95 percent capacity. The company supplies disc wheels for cars, pickups, 4x4s, agriculture tractors and commercial vehicles with customers including Pak Suzuki, Indus Motors, Honda Atlas Cars, Hinopak Motors, Ghandhara Nissan, Al-Ghazi Tractors and Millat Tractors, Orient, Master Motors, Fuso Motors and Afzal Motors. The current distribution of its sales are 80 percent into the car segments; 15 percent into the tractor segment while 5 percent into the trucks and buses segment.
Shareholding Pattern
The company's majority shares are held by the directors and family with the highest shares held by Executive Director, Muhammad Siddiqi Misri (19.8%) and Razak Bangali (11.5%) who is the CEO of Baluchistan Wheels. Within banks and DFIs, National Investment Trust holds 10 percent. Meanwhile, Millat Tractors also holds 10 percent in the company's holding. The general public held nearly 16 percent of the company's shares as at June 2017.
Demand dynamics; financial and operational performance:
Baluchistan wheels being a parts manufacturer has its demand directly tied to the automobile industry including commercial vehicles and tractor segments. The more they grow, the better BHWL performs; and its growth trajectory narrates a growth story for the industry.
Passenger cars have been performing much better since FY15-given higher disposal incomes, cheaper financing, and overall lack of transportation options. Commercial vehicles growth particularly in trucks is coming from infrastructure and CPEC needs which is expected to continue forwards. Meanwhile, tractors sales have been higher with the government subsidising the agricultural sector.
Baluchistan wheels saw a 99 percent capacity utilisation in FY16; but during FY17, this utilisation fell to 78 percent particularly brought forward by lower car wheels' sales. After the Apna Rozgar Punjab Taxi Scheme wrapped up in FY16, Suzuki sold 50,000 less cars, which manifested in a drop in sales; and subsequent drop in sales for wheels.
The company saw a higher growth during FY17 in the trucks and tractor segments. The government gave several subsidies on fertilisers and crop yields to farmers while the sales tax was also brought down to 5 percent. This propelled sales for tractors. Trucks, as mentioned earlier have been on the incline due to the construction development happening across the country, primarily brought by CPEC and other development projects. Together these two factors led to the 4 percent increase in sales for BWHL during FY17.
Costs and margins are a different story. Given the wheels are manufactured locally using a good share of imported steel, steel prices globally as well as locally impact the industry directly. Margins grew from 12 percent during FY13 to 25 percent during FY16. However, rising international steel prices pushed margins down to 19 percent during FY17. The company incurred fixed factory overheads against lower production, which also kept margins lower.
Less than one percent of the company's sales comprises of exports-though this too fell from 0.7 percent in FY16 to 0.2 percent. A marginal increase in revenues together with higher costs led to a drop in profits of 17 percent during FY17, landing at Rs 126 million.
One of the focuses of Baluchistan wheels has been to conserve energy and improve the efficiency of its plants and processes. The company replaced some of its old presses and also added capacity to its compressors to improve quality and bring energy consumption down as well. The company also upgraded its water cooling system for the paint shop, which would help consume less electricity.
In machinery enhancement, the company added welding machines, heavy duty lathe machines and air drying machines to improve efficiency. Moreover, during the current fiscal year, the company intends to add further upgrades into the paint shop as well as the manufacturing line. In the short run, these may incur financing costs but will help boost margins in the long run.
Opportunities and outlook
Whereas the company saw a drop in profits during FY17 due to lower car wheels' sales and an increase in costs of production; the company is likely to witness a strong rebound during FY18 in terms of sales; if not margins. Margins are likely to be dependent on steel prices that have only just started normalising internationally. However, local steel prices have been higher after the regulatory duties and anti-dumping duties imposed by the government to protect local players. This also means more expensive imported content. So whether local or international, raw material costs will remain on the high side.
With the rupee depreciation, all the three car manufacturers are increasing their prices and it is likely Baluchistan wheels will bump up its prices for the industry players as costs climb. This could cushion the blow to margins to an extent.
Demand is something the company may not have to worry about. Passenger cars sales have been phenomenal so far. With the auto development policy in full swing, the industry may see 3-4 more companies enter the car segment, which would mean higher car production; and more business for Baluchistan wheels. The orange cab schemes already announced by the Punjab government will also boost sales with at least a growth of 50,000 more cars. Meanwhile, even in the commercial vehicle segment, new players are entering with sales for existing players growing month after month. The Punjab government announced a KISAN package, which will impact BHWL's tractor segment and ultimately its topline.

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Baluchistan Wheels (Financial performance in 1H)

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Rs (000)                         1HFY18     1HFY17        YoY

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Sales                           855,782    637,484        34%

Cost of Sales                   720,244    555,957        30%

Gross Profit                    135,538    117,527        15%

Administrative                   46,285     40,895        13%

Distribution costs               25,840     20,374        27%

Other operating expenses          5,181      5,587        -7%

Other income (loss)                -129     13,566      -101%

Finance cost                      1,365        723        89%

Profit before tax                56,738     63,514       -11%

Taxation                         12,965     16,528        n.a

Net profit for the period        43,773     47,256        -7%

Earnings per share (Rs)            3.28       3.54        -7%

GP margin                           16%        18%       -14%

NP margin                            5%         7%       -31%

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Source: PSX notice

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Pattern of Shareholding (as o

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Categories of Shareholders                                   %

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Directors and their spouse(s) and minor children        52.20%

Razak Bangali                                           11.50%

Muhammad Siddiqui Misri                                 19.80%

Muhammad Irfan Ghani                                     9.40%

Kausar Irfran                                            4.80%

Gul Bano                                                 3.30%

Banks, development finance institutions,                12.50%

non-banking finance companies, insurance companies,

takaful, modarabas and pension funds

National Investment (Unit) Trust                        10.00%

Insurance Companies                                      2.60%

Mutual Funds and Modrabas                                3.77%

Foreign Companies                                        0.04%

OTHERS                                                  13.16%

Millat Tractors                                            10%

General Public                                          15.83%

Total                                                     100%

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