Baluchistan Wheels Limited was incorporated on 16 June 1980. It is engaged in manufacturing and marketing of automotive wheel rims for trucks, buses, tractors, cars and mini commercial vehicles. It is a vendor participating in import substitution, supplying wheels to Original Equipment Manufacturers (OEMs) and is associated with world renowned OEMs.
The company also exports wheels to other countries. The company is listed on the Karachi Stock Exchange, and was recently included in the KSE-100 during the re-composition of the index. The factory as well as its registered office is situated at Main RCD Highway, Hub Chowki, Lasbella Balochistan.
Baluchistan Wheels Limited is a corresponding member of ETRO and its quality system is certified for ISO-9002 by AIB Vincotte of Belgium. Its R&D (Research and Development) department is quite advanced and is equipped with CAD/CAM facilities and CNC machines for in-house manufacturing of tooling and spare.
COMPANY PERFORMANCEThe sales of Baluchistan Wheels Limited (BWL) crossed the Rs 1 billion mark in 2006, after a 47% increase from 2005's sales figures. In FY07, the sales remained stagnant at the same level as in FY06, but increased marginally by 6% in FY08 to cross Rs 1.23 billion. As far as sales in units are concerned, the company's total production in FY08 was 1,035,000 units. Out of these, 867,000 units are car wheels, while 128,000 units are truck/bus/tractor wheels.
Both these figures are lower than the production levels prevalent in FY06, the period considered best for the company in terms of performance. Considering the sales in monetary terms, in FY08 the sales of car wheels were Rs 776 million compared to FY07's Rs 798 million; truck/bus wheels were Rs 114 million as opposed to FY07's Rs 126 million; sales of tractor wheels increased to Rs 277 million compared to Rs 185 million in 2007. The company also exports its manufactured products, making sales of Rs 32 million in FY08, compared to Rs 21 million in FY07.
Originally, the annual production capacity of BWL plant was rated at 376,000 units. Currently, the actual production on the basis of three shifts has increased the capacity. Over the years, additions to plant and machinery have been made, due to which actual production has exceeded the plant capacity. The company's recorded capacity utilisation was 296% in FY06, but has reduced to 122% by FY08.
The gross profit declined by about 7% from Rs 286.5 million in FY07 to Rs 266.1 in FY08. This is for the second year running that the gross profit has decreased by such a margin of 6%-7%. This is mainly due to the tough economic times prevalent in the country, the high energy costs and the overall inflation plaguing the economy. Net profit was highest in FY06, when it jumped 50% from the net profit of FY05. Since then, the net profit has declined by 13% in FY07, and again by a greater magnitude of 18% in FY08, although the sales in terms of rupees did not suffer such a decline.
FINANCIAL ANALYSIS (FY05-FY08)
The overall profitability of BWL has been on a decline. The nature of this decline has not been drastic, but the company is surely going through a steady reduction in profitability. Gross profit margin was at its peak near 26% in 2006. This was arguably the best year for the company in terms of its performance. After that, this margin declined in 2007 to 25%, and again in 2008 to 22%.
Keep in mind that gross profits have declined in FY07 and FY08 by 6% and 7% respectively. The marginal decrease seen in 2007 was due to relative stagnant sales figures for that year and a very small increase in cost of sales. More profound decrease seen in 2008 was on account of a larger growth in cost of sales compared to sales revenue. Thus, the effect of inflation in the economy, especially the rise of steel prices can be seen. The net profit margin has seen a similar trend, peaking in 2006 at 13% and coming down to only 9% by 2008.
The reasons for this trend are more complex than that of gross profit. One factor leading to this trend was that distribution costs, the third biggest expense deducted from gross profits, have been growing by large amounts. In fact, distribution costs grew by 38% in FY08, even though they had grown by 21% in the year before. Similarly, the administrative expense, which is the second largest cost deducted from gross sales, increased by 9% in 2008. The combined effects of such factors have led to BWL only managing to convert 9% of its total sales into profit.
The return on assets has gradually decreased to 11% in 2008, after being at a high of 18% in 2006. The main reason behind this decline is that net profit has been declining in double-digit figures since the last two financial years. On the other hand, total assets of the company have been increasing in that time, although the growth was only a nominal 2% in FY08. The return on equity has come a long way from the figure of 28% in the prosperous year of 2006 to just 15% by the end of 2008. The low percentages for this ratio do not come as a surprise considering that 70% of BWL's assets are equity-financed. Furthermore, the equity of the company has been witnessing double-digit growth in the last two years of operation. Within the same time period, the net income saw a double-digit decrease, bringing down the ROA ratio.
Over the years, the company has become increasingly well equipped to deal with liabilities maturing within a year, ie its liquidity. This is because both the current ratio and the quick ratio for BWL have been increasing, especially witnessing a big jump in FY08. The current ratio in 2008 was 3.23, up from the previous year's 2.58.
The explanation for this phenomenon is that the current liabilities, which were declining since 2006, saw a change of negative 21%. In contrast, the current assets have been more or less constant in the same period.
Worth mentioning is the fact that the current assets would have seen a big decline in 2008 just like that in current liabilities. This is because most of the heads under current assets saw declines well over 10%. But, the head of investments of BWL grew from FY07's Rs 1.7 million to FY08's Rs 76.8 million.
This drastic increase made investments account for about 13% of the total current assets and it also cancelled out the effect of decline in other current assets. BWL had invested in Defence Saving Certificates initially in FY07 as long-term investments, but then shifted to investing in open-ended mutual funds.
It has invested almost equally in three funds, namely the Faysal Saving Growth Fund, HBL Income Fund and NAFA Cash Fund. On the other hand, the head of trade and other payables forms over 77% of all current liabilities. Trade and other payables decreased by 28% in FY08, mainly due to a drop in the liabilities towards payment of different bills.
The quick ratio has been following the same trend as the current ratio, witnessing a gradual increase, which accelerated in 2008 to 1.42, compared to 0.98 in 2007. Worth noting is that stock-in-trade forms 45% of the total current assets and 28% of total assets, and its figures plunged in FY08 by 13%.
This automatically means that the quick ratio will rise, even more so when the current liabilities are declining simultaneously. The company has been confronting problems of tied-up inventory, which is evident as BWL had to handsomely increase its provisions for slow-moving stock in FY08. To combat such inventorial costs, the company has also been trying to cut down its inventory.
The asset management ratios have improved over time, especially by the end of FY08, which reflects the impact of a decreased inventory. The inventory turnover ratio has declined from about 120 days in 2005 to less than 99 days in 2008, thanks to lean inventory policies of the company and the modest growth in sales. Even in the bad business environment prevalent nowadays, the company has managed to decrease the time it takes to recover its sales made on credit.
The Day Sales Outstanding showed come down from a high of over 40 days in FY05 to a low of less than 29 days in FY08, a significant improvement. The cumulative effect resulted in the operating cycle of BWL being cut by more than a month. Previously in FY05, the operating cycle was almost 160 days long, but by FY08, it had decreased to little over 127 days, or little over 4 months.
The total assets turnover ratio has been fluctuating up and down since FY05, depending upon the growth behavior of sales and the assets of the company each year. In FY08, the TATO ratio improved slightly to 1.25, the causes for which were a greater growth in sales for the year as compared to the growth in total assets.
Property, plant and equipment constitute nearly 30% of total assets of BWL and nearly all of the fixed assets. Investment into property, plant and equipment resulted in growth rates of over 40% in FY06 and FY07, making it a major growth driver.
During that time, vendors such as BWL were going through expansionary activities due to a surge in demand from auto assemblers. In fact, according to the company, the actual capacity of its manufacturing facilities is about 850,000 units per year, meanwhile the actual production for the year FY08 is 1,035,000 units. This increase in the actual production figures is due to procurement of plant and machinery over time.
Meanwhile, the sales-to-equity ratio had been continuously decreasing since FY06, reaching the figure of 1.76 in FY08. Here, the growth rate of equity had outpaced that of sales thus declining the ratio for the past few years. Note that since FY06, the Dividend Payout ratio for BWL has been decreasing each year, 22.61 in FY06, 20.72 in FY07 and 15.72 in FY08.
This means that each year, a greater portion of the profits earned by the company would be reinvested into the company in the form of reserves stated under the equity. This is one of the reasons why the equity saw such a profound increase in those years.
The debt management scenario has been rather mixed for BWL. Keeping in mind that BWL is an equity-financed company, its debt-to-assets ratio and debt-to-equity ratio touched a high mark in FY06 at 36% and 57%, respectively. Since then, both D/A and D/E have gradually declined, reaching the levels of 29% and 40% in FY08.
As mentioned before, the impact of increases in trade and other payables was seen here, as was mentioned before. The decline seen in FY08 is a consequence of BWL not availing its long-term financing facility this year, and because all of its liabilities on assets subject to finance lease have matured within 2008.
Long-term-to-equity ratio followed a slightly different trend, peaking at 17% in FY07 and not in FY06. In FY08, the figure decreased to 14%. Mainly, the reason for the 17% high was that starting from FY06, the company opted for long-term financing, which doubled in FY07.
Simultaneously, BWL's deferred liabilities increased substantially contributing as much as 40% to the total long-term liabilities. Previously, deferred liabilities only constituted 7% of the total long-term liabilities. The result of this sudden increase was that a lot of additions in plant and machinery had been going on in 2005-06. Due to this, there were tax liabilities arising from accelerated tax depreciation. These tax liabilities were deferred and since then have been growing every year.
The Times-Interest-Earned ratio of BWL shows that there is something wrong with the company. After a peak in FY06 of 31.23, the TIE ratio has gone down considerably to 12.17 by FY08. This could be initially attributed to the increased Finance Costs that were paid during and after 2007, due to BWL opting for greater long-term financing in that time.
But the same cannot be said about the year 2008, when the TIE has continued to fall, despite there being a decrease in loans taken by the company and only a nominal increase in Finance Costs. The company's EBIT has been declining after 2006 by more than 10% each year, which resulted in lower TIE figures. Obviously, the company is not performing as well as it should, especially when it is in a leveraged position.
The standing in the market of BWL is satisfactory. It has managed to give cash dividends in a consistent manner throughout the years. In FY06, the cash dividend given out was Rs 2.50 per share, a high figure considering the past six years. However, due to the testing economic times prevalent in FY08, the dividend given out was Rs 1.25 per share.
In fact, only about 12.5% of the total net profit was paid out as dividends, the rest being reinvested into the company. In the past six years, there was never such a low Dividend Payout ratio.
But the company should be credited as it paid out as much as 25% of all their earnings when it had performed well in the prosperous year of 2006. The decrease in Earnings per Share was in line with the reduced Net Profit that has been earned since 2006. The EPS in 2006 was Rs 11.06 while that of 2008 was Rs 7.95.
The higher EPS and Net Profit figures of FY06 partly resulted in the gap that formed between BWL's Book Value per share and Market Value. In FY05, the gap between the two figures was negligible, but the difference soared to about Rs 20 in FY06 and FY07.
The gap is again closing in 2008, with Book Value per share being Rs 52.73 while the Market Value coming down to Rs 59.00. The Price-to-Earnings Ratio has been increasing, despite the decline in market price or in Earnings per Share. Actually, it's the greater decline in EPS compared to the share price that has maintained the upsurge of the P/E ratio even in FY08.
FUTURE OUTLOOKThe recent years have seen a debacle of sales of vehicles in general, not just locally but also globally. Both cars and light commercial vehicles have seen a decline in their sales in Pakistan in the year 2008. Baluchistan Wheels Limited produces wheels for both cars and for LCV like buses and trucks.
But according to the company, it has so far not been as badly affected as other automobile concerns. For example, the total car sales have dropped from 180,834 units to 164,650 units in FY08, in other words a decline of 9%. But the Car Wheels sales of BWL fell by only 3% in FY08. However, there are many factors yet that can have a significant impact when it comes to the company's future.
In the short term, there is an issue of a lawsuit against BWL by the National Bank of Pakistan (NBP) for the recovery of Rs 91.25 million which NBP paid to the Privatization Commission (PC), as a guarantor in a contract for the sale of shares of BWL. The management has not made any provisions for this amount of money, hopeful that the outcome will be in BWL's favour.
However, if it happens otherwise, the amount involved of Rs 91.25 million is nearly equal to the profit for a year of BWL, and is hence a great amount. Financing for the amount in a high interest rate scenario as is prevalent currently will be an added burden on BWL, which is already facing unfavorable circumstances.
The inflationary pressures in Pakistan's economy have had a negative impact on BWL, as it did on most industrial units. The rise in energy related costs in the future would hurt the company. Steel prices had increased in the recent past internationally. In Pakistan, a similar trend was seen when the re-rolling units of steel stopped production due to energy shortages, driving the local steel prices upwards.
At BWL, the Cost of Material accounts for over 50% the products' sales price, thus such price shocks in steel in the future would hurt BWL's sales. The same stands for devaluation of the Pak rupee, as raw materials like steel are imported primarily.
The restrictions on car financing by banks and the high interest rates are a major hurdle to sales of vehicles. This affects the sales of BWL as well. In the short-to-medium term, the interest rates and the risk aversive attitude of the banks will remain as it is today. Thus, no spurt of sales due to car financing should be expected in the near future.
Furthermore, the government has also increased the Federal Excise Duty of 5% on cars above 850 cc, raised GST and has imposed Withholding Tax of 2.5% at registration. Imports of used auto parts and vehicles have been allowed and there are difficult requirements to be met by importers when establishing an L/C for imports. Such measures increase the cost of vehicles and deter purchases, considering that people have lost much of their purchasing power in the recent past.
The company has managed to increase its export sales to Rs 32 million in FY08 from Rs 21 million a year before. Although this feat is commendable, yet it is a negligible portion of the total sales of the company. In fact, the company made over Rs 35 million from sale of scrap in 2008, more than what it earned from exports.
According to Pakistan Association of Automotive Parts and Accessories Manufacturers (PAAPAM), the price and quality of locally manufactured auto parts is of comparable to that of exporters from other countries. Pakistan will also be hosting international exhibitions in the future, like Auto and Auto Parts Pakistan 2009 and also Auto and Transport Asia 2010, which BWL can participate in. However, considering that crisis in the automobile industry is a global phenomenon, exporting local products would be a difficult job.
Services sector of the economy, specifically transport and wholesale, has seen much growth in the last few years. These sectors' growth rate is surely on a decline but yet it reflects a demand (although a decreasing one) for BWL's products, ie wheels of trucks buses, etc.
Furthermore, the government has been focusing on the development of the agriculture sector. The disbursement of agricultural credit is one area that has seen much activity recently. Also, the government is offering incentives to aid the growth of and to develop the corporate agriculture in the country. These developments would eventually lead to increased sales of tractors. BWL should look to capitalize on this opportunity by focusing more on the manufacture of wheels used in tractors.
Furthermore, according to PAAPAM, locally manufactured tractor parts are being exported to the US and EU, ie a demand for Pakistani tractor parts exists internationally. For BWL, this means that focusing on tractor wheels would not only be beneficial for catering to the local market, but for increasing exports as well.
COURTESY: Economics and Finance Department, Institute of Business Administration, Karachi, prepared this analytical report for Business Recorder.
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