Baluchistan Wheels Limited

Baluchistan Wheels Limited (PSX: BWHL) was incorporated in Pakistan as a public limited company in 1980. The principal activity of the company is the manufacturing and sale of automotive wheel rims for cars, buses, trucks, tractors and mini commercial vehicles. The company has an annual production capacity of around 2.5 million wheels per annum.

Pattern of Shareholding

As of June 30, 2022, BWHL has a total of 13.334 million shares outstanding which are held by 1302 shareholders. Sponsors, directors, their spouses and minor children are the major shareholders of BWHL with a stake of 46.10 percent in the company. This is followed by local general public holding 21.72 percent shares of the company. Modaraba and Mutual funds account for 12.42 percent shares of BWHL. Insurance companies hold 2.56 percent shares while Banks, DFIs and NBFIs have a representation of 2.47 percent in the outstanding share capital of BWHL. The remaining shares are held by other categories of shareholders.

Historical Performance (2018-22)

BWHL’s topline which had been dwindling until 2020 posted a robust turnaround in 2021 and the pattern continued in 2022. The bottomline also follows the similar pattern. Margins largely remained on the rise during the period under review except for a dip in 2020. The detailed performance review of each of the years under consideration is given below:

In 2019, BWHL’s sales plunged by 16 percent year-on-year on the back of a decline in the sales of tractor and truck/buses which dropped by 35 percent and 45 percent respectively during the year. While there was a marginal 7 percent year-on-year growth in the sale of car wheels, however, it couldn’t offset the hit coming from other categories. Auto sector didn’t perform well in 2019 due to meteoric rise in the prices of vehicles on the back of steep depreciation of Pak Rupee, high discount rate which restrained auto financing and high petroleum prices during the year. Tractor sales dropped due to low production of cotton crop during the year while trucks and buses sales also plummeted owing to a slowdown in CPEC related activities during the year. The company utilized 79 percent of its production capacity in 2019 versus 96 percent capacity utilization in the previous year. This resulted in a 17 percent year-on-year drop in the cost of sales. However, underutilization of plant capacity increased fixed cost per unit. The company passed on the onus of increased cost to its customers which resulted in GP margin improving from 14.3 percent in 2018 to 15.5 percent in 2019. Distribution expense slid by 25 percent year-on-year in 2019 due to lower carriage and forwarding charges as the company was unable to acquire new orders from OEMs. Administrative expense marginally grew by 1 percent year-on-year in 2019 on account of payroll expense. Higher exchange loss due to Pak Rupee depreciation pushed up the other expense by 51 percent year-on-year in 2019. This was partially offset by a considerable growth in other income due to gain on the sale of property, plant and equipment in 2019 coupled with write off of liabilities which were no longer payable. Despite controlled expenses, operating profit shrank by 8 percent year-on-year in 2019 while OP margin grew to 6.3 percent from 5.8 percent in 2018. BWHL has a debt-to-equity ratio of 14 percent in 2019 which dropped from 15 percent in 2018. However, high discount rate resulted in a 252 percent uptick in finance cost in 2019. The bottomline was trimmed down by 19 percent year-on-year in 2019 to clock in at Rs. 71.51 million with an NP margin of 4.5 percent versus 4.7 percent in the previous year. EPS dropped from Rs.6.58 in 2018 to Rs.5.36 in 2019.

2020 proved to be even worse for BWHL whereby its topline substantially dropped by another 43 percent year-on-year. The outbreak of COVID-19 proved to disastrous for the automobile sector with a massive drop in sales across categories. However, it is pertinent to note that while COVID-19 hit the economy in the last quarter of 2020, the vehicle sales were already dwindling since the beginning of the year due to restriction of car purchase on non-filers of tax, high discount rate which put brakes of auto financing as well as locust attack and water shortage in Sindh and Punjab region which took its toll on the agricultural output and contained the purchasing power of farmers resulting in low tractor sales. BWHL’s plant capacity utilization drastically dropped to 42 percent in 2020 due to tamed demand. The cost of sales dropped by 41 percent year-on-year in 2020. Not only did the gross profit crashed by 52 percent year-on-year in 2020, GP margin also tumbled to 13 percent. This was unlike 2019 where the company secured its margins despite sales drop. Operating expenses slumped by 15 percent year-on-year in 2020 principally due to lower carriage and forwarding and lower salaries expense. Other expense dropped by 86 percent year-on-year due to no exchange loss incurred during 2020. Other income magnified by a substantial 455 percent in 2020 due to higher profit on Treasury bills and saving accounts. This pushed other income up from 0.3 percent of sales in 2019 to 3 percent of sales in 2020. However, curtailed expenses and stunning growth in other income couldn’t prevent operating profit from sliding by 74 percent year-on-year in 2020. OP margin radically dropped to 3 percent in 2020. Although BWHL’s loan book increased during the year as the company obtained SBP’s refinance scheme for the payment of salaries and wages in 2020, finance cost dropped by 65 percent year-on-year in 2020. The bottomline inched down by 74 percent year-on-year in 2020 to clock in at Rs.18.92 million with an NP margin of 2.1 percent – the lowest ever posted by BWHL.

The gloomytimes drew to a close in 2021 as BWHL posted a staggering 73 percent year-on-year growth in its topline. Owing to low discount rate and revival in economic activity post COVID-19, auto industry boasted a strong turnaround in 2021. Strong agricultural yield also buttressed the demand of tractors during the year. This had a positive impact on the sales of BWHL in 2021. The sales of cars, truck/bus as well as tractor wheels posted an exciting growth of 23 percent, 133 percent and 144 percent respectively in 2021. The plant capacity utilization grew to only 44 percent in 2021 despite robust demand. Maybe, the company had leftover finished goods inventory from previous years due to lackluster sales since 2018. The cost of sales grew by 67 percent year-on-year in 2021. Gross profit rose by 107 percent year-on-year in 2021 and GP margin also greatly improved to 15.4 percent. Operating expenses grew by 21 percent year-on-year in 2021 due to high outward freight charges as demand recovered. High salaries and wages also pushed up the operating expenses. High provisioning against WWF and WPPF pushed the other expense up by 488 percent year-on-year in 2021. Other income also doubled in 2021 mainly on account of profit on treasury bills, sale of wastage materials as well as gain on sale of operating fixed assets. Operating profit multiplied by 460 percent year-on-year in 2021 with an OP margin of 9.3 percent. Despite low discount rate during the year, finance cost magnified by 79 percent year-on-year in 2021 due to expansion in BWHL’s loan book during the year. The bottomline grew by 432 percent year-on-year in 2021 to clock in at Rs.100.68 million with an NP margin of 6.4 percent. EPS also surged to Rs.7.55 in 2021.

2022 was another exciting year for BWHL where it posted a 76 percent year-on-year rise in topline owing to rapid economic recovery which stimulated the automobile sales. Cars, Truck/buses and tractor wheel posted a sales growth of 110 percent, 34 percent and 54 percent respectively in 2022. BWHL’s plant capacity utilization increased to 76 percent in 2022. Cost of sales grew due to Pak Rupee depreciation and commodity super cycle in the global market. However, with upward revision in prices and increased demand, the gross profit posted a strong growth of 152 percent in 2022 with GP margin climbing up to 22 percent – the level never seen since 2016. Operating expenses grew by 29 percent year-on-year in 2022 due to marketing induced rise in salaries and wages owing to inflation as well as high freight charges. Higher provisioning against WWF and WPPF coupled with high exchange loss culminated into a 390 percent increase in other expenses. Other income slid by 6 percent year-on-year in 2022 due to lesser gain on sale of operating fixed assets and unrealized loss on change in fair value of listed securities. Despite high expenses, operating profit grew by 195 percent year-on-year in 2022 with OP margin rising as high as 15.5 percent. Despite high discount rate in 2022 due to multiple rounds of monetary tightening, BWHL’s finance cost slid by 6 percent year-on-year as the company largely settled its long-term loan during 2022. The bottomline enlarged by 107 percent year-on-year in 2022 to clock in at Rs.208.24 million with an NP margin of 7.5 percent. EPS flew to Rs.15.62 in 2022.

Recent Performance (9MFY23)

After two blissful years, BWHL kicked off 2023 on a dismal note. Its topline slid by 33 percent year-on-year in 9MFY23. The sales of car, truck/bus and tractor wheels shrank by 41 percent, 20 percent and 24 percent respectively. Dwindling foreign exchange reserves resulted in import restrictions which created immense supply chain impediments for the OEMs and resulted in shut-down of their operations. On the other hand, tamed demand of automobile due to high prices, high discount rate and low purchasing power of consumers also hit the auto industry hard in 2023. Owing to lesser orders, BWHL also suspended its operations twice during 9MFY23. The cost of sales tumbled by 34 percent year-on-year due to curtailed production. While gross profit contracted by 32 percent year-on-year in 9MFY23, GP margin slightly improved from 18.9 percent in 9MFY22 to 19.2 percent in 9MFY23. While distribution expense slumped due to lesser freight charges, administrative expense posted an 11 percent year-on-year rise due to inflationary effect. Other expense inched by 2 percent year-on-year in 9MFY23 while other income posted a 110 percent year-on-year growth due to tremendous profit on treasury bills and saving accounts owing to high discount rate. Operating profit declined by 36 percent year-on-year in 9MFY23 with a slight downtick in OP margin which stood at 11.8 percent versus 12.3 percent during the same period last year. Finance cost grew by 20 percent year-on-year in 9MFY23 on account of higher discount rate. The bottomline plunged by 35 percent year-on-year in 9MFY23 to clock in at Rs.105.94 million with an NP margin of 7.8 percent versus 8 percent in 9MFY22. EPS dropped from Rs.12.23 in 9MFY23 to Rs.7.94 during 9MFY23.

Future Outlook

With no revival of auto industry in sight, BWHL’s topline will continue to be in shambles. However, it is to be noted that while BWHL’s topline and bottomline profoundly shrank in 9MFY23 due to weaker demand, the margins stayed almost intact as it raised its prices to pass on the onus of cost hike to its consumers. While, BWHL’s sales are highly anticipated to slump with a trickledown effect on the bottomline too, to what extent BWHL can shield its margins is yet to be seen.