Thal Limited

Thal Limited (PSX: THALL) is a House of Habib company first incorporated in1966 operating a jute mill. Since then the company has expanded and diversified into a business that caters to the automotives, engineering and construction sectors of the country. The company has two broad segments: engineering segment and building material and allied products segments. The engineering segment that captures the bulk of the revenue share deals in thermal and engine components (air conditioners, radiators) as well as electric and wiring systems, which make up for crucial parts in the auto industry.
House of Habib is known to have an established network of international technical collaborations and in its wing are the likes of Indus Motor and Agriautos-one a major automobile assembler and the other an auto parts manufacturer. Thal adds value to the group with its own auto parts manufacturing; as well as the building allied products it makes under the umbrella of the building material segment. The company manufactures jute, paper sacks and laminates. The manufacturing of jute products takes place in Muzaffargarh, while laminate and paper sacks are made in Hub and Gadoon.
Shareholdings and investments
There are four foreign investors that have 5 percent voting rights (or more) in the company along with National Bank of Pakistan. Together they constitute 46 percent of the company's shares. The company has a number of subsidiary companies that operate in the coal mining, energy and auto parts industries. Thal Boshuku Pakistan (Pvt.) Ltd, A-one enterprises, Habib Metro Pakistan, Makro Habib Pakistan, and Pakistan Industrial aids.
The Habib Metro business is one of the popular ones that owns and manages retail store properties. Thal Limited holds 60 percent shareholding in the subsidiary while 40 percent is held by Metro Cash and Carry Pakistan (Private) Limited. During FY17, Thal divested its investment in Metro Habib for Rs 2.12 billion and realized a one-time gain of Rs 1.84 billion before tax that boosted its bottom line during the year.
Thal also has made investments in the energy sector. The first is the joint venture investment in Sindh Engro Coal Mining Company (SECMC), which was formed between government of Sindh, Engro Powergen Limited, Hub Power, Habib Bank, CMEC Thar Mining Investments Limited, and SPI Mengdong along with Thal. The company is developing an open pit coal mining project in Thar.
According to its annual report, Thal Limited approved a total exposure of $36.1 million for the first phase that includes equity investment, cost over-run and debt servicing reserve. To date the company has invested Rs 899 million (or $ 8.71 million) in the project.
For the same project, through its subsidiary Thal Power limited, the company incorporated a joint venture project company called ThalNova Power with Novatex Limited. They would develop a 330 mine mouth coal fire power generation plant in Thar. This power plant will be based on lignite coal extracted from the mine operated by SECMC.
Financial and operational performance
Thal's primary business of automotive parts products-which include car air conditioners, alternators, and starters-is dependent on the performance of the automotive industry. Better incomes, lack of public transportation in urban localities, financial availability and cheaper financing through banking channels have allowed auto sales to go up. Since FY16, the auto sector has seen a great disruption in sales in most of the car segments. Together with this organic demand was the Punjab Apna Rozgar scheme that also boosted sales of cars in that area. This is a burgeoning market for Thal limited.
With CPEC related activities; construction and building demand; the commercial vehicle market is also not left behind, which again boosts the demand for Thal's parts manufacturing business.
For its car air conditioners, the company recently has been operating between 80-92 percent capacity, while for alternators and starters, the company is running at 60-70 percent capacity. This would go up as the auto industry growth trajectory persists. The aftermarket is another area that Thal Limited has a growing market even though smuggled parts do curb the business.
The company sees its top-line grow consistently over the years with a dip in FY14. Capacity utilisation may have slightly decreased in the engineering segment during FY17 (in the aftermath of the taxi scheme wrapping up) but even with lower capacity, revenues grew with the likely improvement in prices. The company attributes its sales growth in the segment to the launch of a new model by its customer as well as improved performance in the commercial vehicle segment.
The building material segment performed better during FY17. Jute sales drew the revenues with higher sales of laminates and paper sacks as well driven by the cement sector and other packaging businesses. With cement sales skyrocketed, the paper sack business is also taking off for Thal even though it is facing competition from woven polypropylene and other paper sacks manufacturers. After the regulatory duty on imported sack paper, Thal may find reprieve in this segment.
Thal is a prominent player in the jute industry. It hit snags in the preceding years when Bangladesh banned the export of raw jute. Healthy jute crops in Bangladesh and India now may result in prices falling, which would help Thal improve its margins on the product. Grain sacks sales also went up as government procurement agencies built up stocks to overcome a lower carryover of wheat stock that contributed to Thal's business.
Over the past 5-6 years, gross margins have remained between 18-22 percent; where margins dropped to 21 percent during FY17 from 22 percent the previous year. Dependence on imported content for local manufacturing in nearly all the segments limits improvements in margins, especially when higher demand for commodities drives prices up. With the currency depreciation, imports have become even more expensive and end-user prices will have to be adjusted accordingly. Price of raw materials in the laminates and jute business (such as chipboard, formalin and phenoas) as well as in the engineering business will continue to pose a challenge for Thal's margins.
Opportunities and outlook
Since nearly 80 percent of Thal's business comes from engineering components that cater to the automotive manufacturing and assembling sector; it goes without saying that the next few years will boost Thal's business tremendously. Not only will there be more cars and commercial vehicles made by existing players, they will also be introducing new models. Moreover, with the new auto development policy, that has been astonishingly going well, safe for some minor hurdles, a handful of new players are expanding the market size.
These new businesses and joint ventures for assembly in both car and commercial vehicles will enter over the next five years. Growth in market size will boost Thal's auto component segment. This may even be an opportunity for Thal to diversify further into more high-tech innovative parts that will be used in both the manufacturing and the after sales markets.
The second major industry that will impact Thal's top-line is the cement industry that is growing between 10-15 percent over the next few years. In fact, capacity utilisation for the sector month on month is reaching 99 percent. With a few expansions on track, and demand flourishing, this will be a consistent business for Thal's sacks products. Competition from polypropylene will persist despite the RD on imports. Thal may be thinking about investment in a plant that manufactures this variety of bags, which could help it gain market share. Meanwhile, growth in retail and food industries will also enhance sales for carrier bags that are being introduced by Thal.
Even though Thal faces competition from the informal sector in its packaging business and in the after-market of the auto sector, there is something to be said about the manufacturing efficiency that lowers costs and the end product quality, both of which should be Thal's focus.
Meanwhile, Thal's investments in the energy sector as well as its diversification in other manufacturing ventures will go a long way in
contributing to its bottom-line.

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Thal Limited (Unconsolidated Financial performance in 1H)

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Rs (000)                               1HFY18       1HFY17          YoY

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Sales                               8,447,632    7,598,233          11%

Cost of Sales                       6,904,287    5,925,062          17%

Gross Profit                        1,543,345    1,673,171          -8%

Administrative                        357,500      315,106          13%

Distribution costs                    102,844      106,208          -3%

Other operating expenses              115,275      209,974         -45%

Other income                          727,016    2,387,373         -70%

Finance cost                            3,393        4,400         -23%

Profit before tax                   1,691,349    3,424,856         -51%

Taxation                              418,191      842,359         -50%

Net profit for the period           1,273,158    2,582,497         -51%

Earnings per share (Rs)                 15.71        31.87         -51%

GP margin                                 18%          22%         -17%

NP margin                                 15%          34%         -56%

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Source: PSX notice

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Pattern of Shareholding (as on June 30, 2017)

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Categories of Shareholders                                            %

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Directors and their spouse(s) and minor children                   8.0%

Ali S. Habib                                                       2.6%

Associated Companies, Undertakings and Related Parties             0.7%

Habib Insurance Company Limited                                    0.7%

Financial and Insurance Companies                                 26.7%

National Bank of Pakistan                                          6.4%

Foreign Investors                                                 40.4%

Mustafa Limited                                                   10.2%

Asad Limited                                                       9.3%

Ali Reza Limited                                                   9.3%

Shakir Limited                                                     6.7%

Others                                                            24.2%

Total                                                              100%

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Source: Zakheera

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Plant Capacity and Utilization

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Production                               2017         2016

Jute (tons)                            22,474       15,534

Auto air conditioners                  77,363       82,560

Wire harness                          131,263      128,578

Paper bags (000)                      105,202       95,067

Alternators                            53,669       57,529

Starters                               53,380       57,609

Utilization

Jute (tons)                               66%          46%

Auto air conditioners                     86%          92%

Wire harness dependent on product mix

Paper bags (000)                          75%          68%

Alternators                               60%          64%

Starters                                  59%          64%

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