Bolan Casting Limited

Bolan Casting (PSX: BCL) is in the business of manufacturing castings for tractors and automotive parts. The company was incorporated in 1982 by the Pakistan Automobile Corporation (PACO) under the administration of Ministry of Production. The plant located in Hub, Baluchistan was commissioned in 1986. In 1993 the automotive castings maker was privatised and the control was taken over by a joint venture between Millat tractors and employees of Bolan casting. The company currently caters to the tractor and commercial vehicle segments of the automotive industry manufacturing tractor castings such as cylinder blocks, cylinder heads, center housings, transmission cases and commercial vehicle castings such as brake drums, and hubs. The plant has the capacity to produce 16000 tons of tractor automotive castings every year with over 200 different types of casting capabilities.
The company has 10 major customers include Millat and Al-Ghazi tractors, while in the commercial vehicle segment; its customers include Hino Pak Motors, Master Motors, Afzal Motors and Ghandhara group. Meanwhile, Millat Equipment and Alsons Industries are also its customers. The company procures its raw materials from local as well as imported sources and some of its primary inputs include pig iron, coke, bentonite, cold dust, core coating, core adhesives etc.
In the FY17, the company's majority holdings (46%) were with its associate company Millat Tractors, which is also its largest client. While Directors and executives together held on 4 percent of the shares; National Bank of Pakistan holds 9.59 percent while individual investor Munaf Ibrahim holds more than 5 percent shares in the company. The general public on the whole carries 25.4 percent of the company's holdings.
Financial and operational performance
Bolan Casting's business is mostly pegged to the performance of the tractor industry, which itself is dependent on how well the agriculture sector performs. Though the agri sector contributes significantly to the GDP, the purchasing power of farmers is usually limited and tractor sales largely depend on government incentives. Historically, sales tax on tractors has played a pivotal role in the tractor business. This has affected Bolan Casting's business as well; positively when sales tax was lowered and adversely when it was increased.
The company's sales were really strong uptill FY11 with production capacity at its peak but with lower sales in the tractor segment of the automotive sector as well as lukewarm demand in the commercial segments, sales for Bolan Casting also dropped. Capacity utilization in fact, came down to 65 percent during FY14.
Capacity utilization for Bolan Casting aligns with the movement of tractor sales tax. In 2011, the government levied a GST of 17 percent on tractor sales. This was brought down to 5 percent later in 2012 which was again brought up to 10 percent in 2013 and again to 17 percent in 2014, where it stayed for 2015 as well.
For tractor players, 2016 wasn't a great year as poor crop production was poor led to lower demand from growers and investors while the two tractors schemes announced by provincial governments were not implemented. Consequently, we see Bolan Casting's business also plummet-capacity utilization dropped to 64 percent lowest in the past decade.
However, a turnaround in FY17 helped. Sales tax was reduced down to 5 percent while the government offered subsidy on fertilizers, pesticides, and energy, while reducing mark-up rates on agricultural loans, which helped boost agricultural output and in turn tractor sales. This allowed BCL to shore up its sales once again at least on the same level as FY15. Capacity utilization stood at 88 percent.
Historically, the company has been marred with higher costs of production of which raw materials costs take up majority of the share. The costs are sensitivity to global commodity prices as well as currency fluctuations as a good share of inputs are imported. Fuel prices also affect costs considerably. At its peak sales in FY11 in the past decade, the company's gross margins stood at 12 percent and have remained less than 15 percent over the years.
Cost pressures for Bolan are high. Not only fuel and power; the company spends significant amount on wages for factory employees and outsourced contractors. In fact, a break-down of FY17's costs show that while 53 percent of the cost of sales went into raw materials; nearly 20 percent of the total costs are associated with salaries and wages of factory workers as well as job contractors while 14 percent of the costs were for energy expenses including fuel, power, coke, diesel and oil. The costs of production for the company are simply too high.
Even so, FY17 was a good year for the company in terms of profitability. It earned the highest profits during the year over the past decade with a profit margin of 5.6 percent. Improved profitability comes with higher sales, but with reasonable increase in sales prices that has allowed the company to improve margins in the face of higher costs of production.
Opportunities and outlook
Even during tough times of higher fuel prices and energy shortages, the company only incurred losses once during FY14 and has been profitable by and large. Higher costs of production will continue to limit Bolan Casting's bottom-line. Each time the currency depreciates, the company will see its relative costs go up and unless it raises prices in tandem, it will see further depletion in margins. The recent financials for 9MFY18 show that though revenues grew by 34 percent and indirect expenses remained 6 percent of revenues, the company saw its net margins drop to 6 percent from 8 percent- mainly due to higher costs of sales.
The company's profit margins have remained less than 5 percent until FY17 when they stood at 5.6 percent. Greater control over distribution expenditure (mainly freight) and administrative expenses could help beef up these margins but evidently, not by a lot. The adjustment will have to be done in the revenues and costs of production area. Bringing efficiencies to the plant could help the company cut down some of its costs, especially in energy conservation. However, ultimately, without scale, the company will remain susceptible to these increasing costs. It will have to boost production significantly.
For that matter, demand is on Bolan's side. Bolan will find a great market not only in the tractor industry but in allied engineering and commercial vehicle segments as well. While favourable government policies in agriculture would drive the tractor demand, the commercial vehicle segment in the country is seeing so many new players enter the market space. This opens doors for new business opportunities for auto parts makers. Meanwhile, the associate company Millat tractor has launched emissions free tractors, which might find market access abroad. Tractor sales locally as well as in exporting markets will bode well for BCL as well.

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Bolan Casting (Financial performance in 9M)

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Rs (mn)                        9MFY18     9MFY17    YoY

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Sales                         1,743.4    1,298.0    34%

Cost of Sales                 1,474.4    1,067.9    38%

Gross Profit                    268.9      230.1    17%

Distribution costs               45.0       35.5    27%

Administrative costs             53.8       35.7    51%

Other operating expenses         11.7       11.5     2%

Other income                      8.1        7.4    11%

Finance cost                      8.6        9.9   -13%

Profit before tax               158.0      144.8     9%

Taxation                         46.3       44.7     4%

Net profit for the period       111.7      100.0    12%

Earnings per share (Rs)          9.73       8.71    12%

GP margin                         15%        18%

NP margin                          6%         8%

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Source: Company accounts

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Pattern of Shareholding (as on July 30, 2017)

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Categories of Shareholders                      %

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Foreign investor                            0.24%

Directors, Executives and family            4.05%

Associated Companies                       46.26%

Millat Tractors                            46.26%

Investment Companies                        4.26%

National Investment Trust                   4.26%

Joint Stock Companies                       1.42%

Banks, development finance institutions,    9.59%

non-banking finance companies,

insurance companies, takaful,

modarabas and pension funds

Insurance Companies                         2.80%

General Public                             25.41%

Others                                      5.96%

Total                                        100%

Shareholders holding 5% or more

Millat Tractors                            46.26%

National Bank of Pakistan                   9.59%

Munaf Ibrahim                               5.23%

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