Personal Goods: THAL LIMITED - Analysis of Financial Statements Financial Year 2005 - 1Q Financial Year 2011

Thal Limited engages in the manufacture and sale of jute goods, engineering goods, papersacks, and laminate sheets in Pakistan and internationally. The company operates in two segments, engineering, and building material and allied products. The engineering segment engages in the manufacture of automotive parts, including auto air-conditioners, wiring harnesses, heater blowers, and AC controls.
The building material and allied products segment consists of jute, paper sack, and laminate operations. Its products include twill sacks, coffee and sugar sacks, heavy and light cees, Hessian cloth, and jute yarn and twine used for packing purposes; multiply paper sacks used for packaging industrial powder based materials, such as guar gum, bonding adhesives, agro seeds, and calcium; and paper and fabric based phenolic laminates, laminated chalkboards, engraving grade laminates, marker boards, laminated hardboards and chipboards, and low pressure melamine impregnated laminated boards. The company was formerly known as Thal Jute Mills Limited and changed its name to Thal Limited in February 2004. Being the first industrial project of House of Habib, the company was incorporated in 1966 and is headquartered in Karachi, Pakistan. The company is listed on the Karachi and Lahore stock exchanges.

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COMPANY SNAPSHOT

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Name of company                          THAL LIMITED

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Nature of business                     Personal goods

Ticker                                          THALL

Net Sales FY'09                          Rs 8,262,982

Net Sales FY'10                          Rs 8,262,983

Share price - year end (Jun 30, 2010)        Rs 94.45

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RECENT RESULTS 1Q11
The sales of Thal increased by nearly 25% to Rs 2.4 billion from Rs 2.0 billion in the same period last year. Other operating income increased to Rs 77 million as compared to Rs 14 million in the SPLY. Distributive and administrative expenses increased in line with the inflationary pressures. Financial charges nearly doubled to Rs 34 million from Rs 18 million. PAT increased to Rs 299 million from Rs 209 million in the same period last year. EPS swelled to Rs 5.85 as compared to Rs 4.09 in the same period last year.
The strong performance was backed by 29% improvement in turnover of the engineering segment on back of improved demand from the OEMs. The building material and allied product segment barely outperformed previous quarter performance by 5%. Jute operations saw a decline though due to non-availability of jute in the market and due to floods in the vicinity of the jute factory. Paper sack division also faced problems due to floods as well as decline in the demand from the cement sector due to uncertainty and economic pressures.
However, going forward, the company shows good prospects, as it is diversifying its local base and also venturing into the international arena, which will protect it against the negative local shocks.
FINANCIAL PERFORMANCE (FY05-FY10)
Subsequent to the merger of Pakistan Papersack Corporation Ltd., and Khyber Papers (Private) Ltd., and Balochistan Laminates Division into Thal Limited, the company has emerged much stronger by the end of fiscal year 2008. "One Thal" budded successfully.
The conglomerate which increased its sales revenue to Rs 7.514 billion from Rs 6.826 billion in FY08 whilst contributing Rs l.82 billion to the national exchequer and Rs 58 million towards Workers Profit Participation Fund and Rs l9 million to Workers Welfare Fund. The trend of growing sales continued in FY09, though the year was full of uncertainties with economic growth hovering around 2% against the economic growth of 4.1% the previous year. Massive contractions were witnessed due to acute energy outages, security environment and political disruptions, the company achieved a sales growth of 10%. Sales increased from Rs 7,514 million in FY08 to Rs 8,263 million in FY09. The export sales saw a decrease over the year whereas local sales increased by 10.5%. The country is still facing tough economic conditions yet Thal Limited managed to increase its sales by 36%, reaching 11.2 billion as opposed to 8.2 billion in FY09.
During FY10, the Jute Division export has substantially increased to US $5.25 million (Pak Rupee 449 million) as compared to US $4.7 million (Pak Rupee 365 million) in the similar period last year, i.e., an increase of Rs 84 million. The increase in exports is attributable to quality and customer confidence reposed in the company.
Profitability has decreased over the years due to slow economic growth, financial crunch in international market and devaluation of rupee. However, the company has regained its profitability, with gross profit margin increasing to 22% as opposed to 17% in the following year. This year, the company has shown the highest gross profit margin as compared to the last five years. The bottom line profitability has also improved by 4% reaching 1.366 billion as opposed to 0.6 billion in FY09. This increase can be attributed to a drastic increase in operating profit which rose by 80% in FY10.
In FY08, the investment in Makro-Habib raised the total assets of the company by a large volume. Total Assets increased by 4% from Rs 5635 million to Rs 5870 million in FY09. However, this year's increase in profitability positively affected the return on equity and total assets with ROA increasing to 19%. The equity base of the company has increased largely due to an increase in the reserves of the company, which have shown a rising trend over the years. Total equity increased by 17% from Rs 3743 million to Rs 4388 million in FY09. This year the increase in equity can be solely attributed to increased retained earnings as the company has not issued any new shares this year. The return on equity increased tremendously, reporting 27% as opposed to 16% last year.
The liquidity of the company was on a rise till 2007 after which it declined. It has slightly improved during the FY09 when the current ratio has been way above 1.00 over the years, exceeding 4 in the year 2007. Both the current assets and current liabilities have increased over the years, however, the increase in current assets, has been proportionately greater than the increase in the current liabilities. Consequently, the overall liquidity of the company had risen. In FY08, there was a major rise in current liabilities, particularly the short term borrowings done by the company from Habib Metropolitan Bank, a related party, and others, raising the amount from Rs 176 million to Rs 659 million. However, these short term borrowings declined by 51% in FY09 to Rs 324 million. This improved the current ratio from 2.10 in FY08 to 2.77 in FY09. During the year, current assets increased by 4% from Rs 3097 million in FY08 to Rs 3221 million in FY09 whereas current liabilities decreased by 21% from 1473 million in FY08 to Rs 1161 in FY09 due to decrease in short-term borrowings.
During the period under consideration, the liquidity position has slightly deteriorated and this decrease can be attributed to increase in current liabilities which rose by 71% as opposed to current assets which increased by 36% only. Major element of current assets which increased over the period was stock in trade whereas in current assets, trade payables showed a drastic increase ultimately negatively impacting the liquidity of the company.
The asset management performance of the company has been showing an irregular trend over the years. The day sales outstanding, which initially were high, have been constant since FY06 showing that the company has improved its policy for creditors. The inventory turnover was raised in FY08 and FY09, particularly due to the time consumed in exporting goods, hence rising the overall operating cycle. This year however, the days outstanding sales have decreased to 20 days reflecting the improved debt collection of the company. This has also resulted in an improvement in the operating cycle of the company which has reduced to 102 days as opposed to 124 days in the last year.
The total asset turnover and sales/equity has been decreasing in FY08, as the assets and equity rose exponentially due to the buying of Makro. TATO showed an improvement in FY09 due to 10% increase in turnover as compared to 4% increase in total assets. Sales to equity further declined for FY09 due to 17% increase in equity. However both these ratios have remained stable over the period.
The company has maintained a praiseworthy debt-management profile till FY07. The total debt to asset ratio had been declining as had the long-term debt to equity ratio. This is because even though the total debt of the company had been rising, the increase in debt was not proportionately greater than the increase in assets and equity. In FY08, the company incurred both long-term and short-term finances, mostly from Habib Metropolitan Bank, a related party, specifically for the purpose of buying the shares of Makro, which led to the sharp increases in both current and long-term liabilities, hence raising the debt to asset and long-term debt to equity ratios. But as these were one-time expenses, all the ratios showed a decline in FY09.
Debt to asset increased from 0.25 in FY09 to 0.32 in FY10. Debt to equity also increased from 0.34 to 0.48. This increase in both ratios can be attributed to dramatic increase in long-term financing which increased by 200% in FY10.
The Times Interest earned (TIE) ratio of the company faced a decline in FY05. This is because the financial expenses for the year under review escalated to Rs 15.869 million from Rs 8.550 million in FY04, mainly due to an increase in the rate of mark-up by the financial institutions and funds tied up in increased inventory and receivables. The loss on account of foreign exchange amounting to Rs 2.261 million has also been classified under financial expenses under the new IAS requirements. However, even in FY05 the TIE was pretty high at 38.28. The TIE improved to a swooping 68.57 in FY06, mainly because of a decline in the company's financial costs to Rs 13.920 million while the operating profit of the company increased to around Rs 954.5 million. However, it again declined in FY07 due to higher finance costs. In FY08, the interest rates on the short and long term loans undertaken caused the TIE ratio to decrease to 22.87, still a fairly impressive figure for a company that also faces high costs of manufacturing. The decline continued for FY09 and the TIE ratio has fallen to a level of 6.62 due to drastic increase in finance costs by 263% from Rs 52.641 million to Rs 191.185 million. Although the debt has increased drastically in this year, the financing charges have reduced to almost half. Thereby improving the company's TIE ratio to 23 times as opposed to 6 times in the last financial year.
Since the company has shown overall improvement in profitability, debt and asset management ratios, all this has a positive impact on the earnings per share and also on the price of stocks. EPS has shown a drastic increase on 74% and shareholders can now enjoy an EPS of 26 Rs as opposed to 15 Rs in last year. The P/E ratio has decreased because the increase in price doesn't match the improvement in earnings per share. Over the last six years, the company has managed to pay dividends to its shareholders. Though after conglomerate, the dividends were low as FY07 - FY09 was a difficult period for the company.
FUTURE OUTLOOK
Fiscal year FY10 begun on an optimistic note after the government announced withdrawal of 5% FED on cars above 800cc. Currently, there are 7.5 cars per 1000 persons in Pakistan as compared to the whole average of 120. There exists a huge potential and this number can be increased depending on strengthening of middle class through anti-inflationary policies by the government.
The country's economy is currently facing a crisis-like situation and it will surely hit the company s performance for the next year. Thal needs to keep its head up in this time of crises, which may recede if expeditious actions are taken to resolve the crises.
With devaluation of rupee being the major contributors to increasing cost of imported raw materials, the profitability of laminates operations are expected to be ultimately impacted. In view of difficult local market conditions, the company is looking beyond borders for opportunities in neighbouring export markets of Middle East, North Africa and South Asia, which would remain areas of concentration in the coming period.

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THAL LIMITED

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KEY FINANCIAL HIGHLIGHTS

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                              2005     2006     2007     2008     2009     2010

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Liquidity

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Current Ratio                 3.30     3.54     4.71     2.10     2.77     2.21

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Asset Management

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Days inventory Outstanding      91      102       81      100      102       82

Days Sales Outstanding          39       37       27       28       22       20

Operating Cycle                130      139      108      127      124      102

Total Asset Turnover          2.13     1.84     1.84     1.33     1.41     1.35

Sales/Equity                  2.94     2.43     2.25     2.01     1.88     1.99

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Profitability

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Gross Profit Margin          20.32%   19.86%   19.17%   17.01%   17.28%  21.79%

Net Profit Margin            11.71%   11.23%   10.84%    9.72%    7.92%  12.14%

Return on Assets             24.92%   27.26%   21.41%   15.64%   11.37%  19.20%

Return on Equity             34.46%   36.57%   27.09%   21.55%   16.09%  27.19%

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Debt Management

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Debt/Asset                      28%      24%      18%      34%      25%     32%

Debt/Equity                     38%      32%      22%      51%      34%     48%

Long-term Debt/Equity            1%       1%       1%      11%       7%     13%

Times Interest Earned        38.28    68.57    37.83    22.87     6.62    23.87

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Market Value

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Earnings per share           11.55    13.56    17.36    17.13    15.34    26.71

Price (as on Jane 30)        105.5   169.05      279      198    77.45    94.94

P/E Ratio                      9.1     10.9     16.1     11.6      5.0      3.6

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COURTESY: Economics and Finance Department, Institute of Business Administration, Karachi, prepared this analytical report for Business Recorder.
DISCLAIMER: No reliance should be placed on the [above information] by any one for making any financial, investment and business decision. The [above information] is general in nature and has not been prepared for any specific decision making process. [The newspaper] has not independently verified all of the [above information] and has relied on sources that have been deemed reliable in the past. Accordingly, the newspaper or any its staff or sources of information do not bear any liability or responsibility of any consequences for decisions or actions based on the [above information].
Copyright Business Recorder, 2010