BALUCHISTAN WHEELS LIMITED

FINAL REPORT

SUBMITTED TO: SIR NOUMAN AFGHAN

SUBMITTED BY: MUJTABA HASSAN SARA RIAZ SYED SALMAN GILANI ZAIN UMAR ALI WAJIH AMJAD

Company History:
Located in the industrial zone of Hub about 35 kilometers from Karachi, Baluchistan Wheels Limited was setup in 1980 for the manufacturing of steel wheels for automobiles with technical collaboration of GKN Sankey Limited UK. The plant has a covered area of 16,000 square meters and builds on a land of 97,000 square meters. It has the capability to manufacture diverse range of wheels for passenger cars, commercial vehicles, agricultural tractors and 4x4 vehicles. The company is a corresponding member of European Tyre& Rim technical Organization (ETRTO) and its quality management system is certified for ISO-9002 by AIB Vincotte of Belgium. The Plant is well equipped with highly sophisticated facilities comprising of the material preparation line, heavy and light duty rim lines, a press line having presses of upto 1500-ton capacity, an assembly and welding line with CO2 and submerged arc welding machines. The manufacturing is complemented by two conveyorised paint shops with seven stages pretreatment system and the second one comprises of the most modern Cathodic Electro Deposition painting process using latest paints from Kansai Paint Co. Japan. Specialized facilities of pickling and oiling shot blasting, tool and die making repairing and quality testing/inspection exist. The last three years witnessed significant growth in the automobile industry of Pakistan . The rapid growth has been triggered by a regular high growth in economy and increase in the purchasing power of customers. To meet the challenge of ever increasing demand in the country and as well as abroad, BWL brought a wide diversity in the products, currently the company operates on a total land of 97,000 square meters while plant has covered area of 16,000 square meters. The annual production capacity has increased from one million wheels to 2.5 million wheels per annum.

Ratio Analysis
Liquidity Ratio Current Ratio A liquidity ratio measures a companys ability to pay short term obligations. It measures the relationship between the amount of liquid assets a company has that could be used to pay short term liabilities such as payments to creditors. Generally the rule says the higher the ratio, the more liquid a company is. Automobile industry on average has current ratio of 1.5. If the company has a far greater current ratio, it means it is missing on other investment opportunities. We can see that the ratio has appreciated over the period which is not a good sign. The company will have to re-allocate its assets towards fixed assets portion. 2007 2.58 2008 3.23 2009 3.73 2010 3.69 2011 3.42

Current Risk
4 3.5 3 Axis Title 2.5 2 1.5 1 0.5 0 2007 2008 2009 2010 2011 Current Risk

Quick Ratio Quick Ratio measures a companys liquidity. It is similar to Current ratio though more conservative. It only includes the most liquid assets and hence excludes inventory from list of current assets. Generally, higher the ratio, the better. Based on the table, the ratio went through an upwards and downwards trend but has remained around 1. This is a good sign as it shows that the management has a firm control of its assets in comparison to its current liabilities. 2007 .98 2008 1.42 2009 1.02 2010 0.9 2011 1.02

Quick Ratio
1.6 1.4 1.2 1 0.8 0.6 0.4 0.2 0 2007 2008 2009 2010 2011 Quick Ratio

Cash Flow The ratio compares the dollar amount of cash flow from operations for every one dollar short term liability. If the ratio is higher, it means the company is making efficient use of resources. In case of Baluchistan, the ratio was 0.3 in 2007 which reduced to 0.23 in 2011. The ratio is well below industry average. This means that the company is doing poorly towards allocation of finances. 2007 0.3 2008 0.69 2009 0.24 2010 0.08 2011 0.23

Cash Flow
0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 2007 2008 2009 2010 2011 Cash Flow

Defensive Interval Ratio

It is an efficiency ratio that measures how many days a company can operate without having to access non-current (long-term) assets. It is considered to be better than current and quick ratio. The ratio has declined from 314.68 days in 2007 to 154.01 in 2011. Even

then it is well above the average as it means that the company will be able to cover all its daily expenses using only current assets for 154 days.

2007 314.68

2008 526.02

2009 146.59

2010 41.07

2011 154.01

Defensive Interval Ratio

600 500 400 300 200 100 0 2007 2008 2009 2010 2011 Defensive Interval Ratio

Activity Ratio Inventory Turnover The ratio shows how many times a companys inventory is sold and replaced over a period. A higher ratio shows either strong sale patterns or low inventory stock whereas low ratio means either weak sales or high inventor stock. In case of Baluchistan Wheels, the ratio has deteriorated from 3.21 in 2009 to 2.86 in 2011. This means that the company needs to boost its sales and manage extra inventory causing higher handling storage expenses. 2007 2.75 2008 3.26 2009 3.21 2010 3.05 2011 2.86

Inventory Turnover
3.3 3.2 3.1 3 2.9 2.8 2.7 2.6 2.5 2.4 2007 2008 2009 2010 2011 Inventory Turnover

DOH The ratio measures the number of days inventory stays with the company. Higher the ratio means that the the company is able to sell and use its inventory at a faster rate. In case of Baluchistan Wheels, the ratio took a sharp decline during 2007-2008 but from then has faced a consistent rise. 2007 132.81 2008 111.88 2009 113.85 2010 119.57 2011 127.65

DOH
135 130 125 120 115 110 105 100 2007 2008 2009 2010 2011 DOH

Receivables Turnover

The ratio calculates and analyses a companys effectiveness in extending loans and collecting debts. The higher the ratio, the more effective a company is in dealing with its creditors. In case of Baluchistan Wheels the ratio has remained stable over the five years. 2007 10.54 2008 11.6 2009 11.46 2010 12.95 2011 11.54

Receivables Turnover
14 12 10 8 6 4 2 0 2007 2008 2009 2010 2011 Receivables Turnover

DSO It calculates approximately time it takes for company to collect money from its debtors. Having a lower average collection period means that the company recovers money from its credit customers in a shorter time period. In case of Baluchistan Wheels, the number of days has remained stable over the five years. For instance in 2007, days required were 34.64 while in 2011, they were 31.64. 2007 34.64 2008 31.48 2009 31.85 2010 28.18 2011 31.64

DSO
40 35 30 25 20 15 10 5 0 2007 2008 2009 2010 2011 DSO

Payables Turnover
A short-term liquidity measure used to quantify the rate at which a company pays off its suppliers. A lower figure means that the company is making late payments which is good from companys point of view. In case of Baluchistan Wheels, the turnover ratio has increased which means quick payments. This has restricted payment flexibility that the company once used to enjoy in 2007

2007 4.63

2008 5.37

2009 7.29

2010 9.21

2011 10.87

Payables Turnover
12 10 8 6 4 2 0 2007 2008 2009 2010 2011 Payables Turnover

Number of Days of Payables

This quantifies the payable turnover in terms of days. Due to tight policies adopted by suppliers of Baluchistan Wheels over the period, the days payable have come down from 78 in 2007 to only 33.6 in 2011. This again shows the financial pressure and strict creidit policies that the company is facing. 2007 78.82 2008 67.97 2009 50.04 2010 39.65 2011 33.59

No of Days payable
90 80 70 60 50 40 30 20 10 0 2007 2008 2009 2010 2011 No of Days payable

Working Capital Turnover This ratio helps us to calculate how effectively a company is using its working capital to generate sales. Higher ratio means the company is doing good and vice versa. In case of Baluchistan Wheels, the ratio has marginally declined and on average has remained the same. The management should try to incorporate newer methods and technology to improve its operational effectiveness. 2007 3.3 2008 3.12 2009 2.7 2010 3.31 2011 3.13

Working Capital Turnover

3.5 3 2.5 2 1.5 1 0.5 0 2007 2008 2009 2010 2011 Working Capital Turnover

Fixed Asset Turnover

The fixed-asset turnover ratio measures a company's ability to generate net sales from fixed-asset investments. A higher fixed-asset turnover ratio shows that the company has been more effective in using the investment in fixed assets to generate revenues. The company faced a dip in the ratio in 2009 mainly due to external factors (recession), but otherwise has been able to maintain a stable fixed asset turnover.

2007 3.83

2008 3.34

2009 2.75

2010 3.36

2011 3.6

Fixed Asset Turnover

4.5 4 3.5 3 2.5 2 1.5 1 0.5 0 2007 2008 2009 2010 2011 Fixed Asset Turnover

Total Asset Turnover

The amount of sales generated for every dollar's worth of assets. It is calculated by dividing sales in dollars by assets in dollars. Apart from 2009, when the production of passenger cars in Pakistan reduced by a huge faction, the ratio has remained stable.

2007 1.29

2008 1.27

2009 1.13

2010 1.41

2011 1.38

Total Asset Turnover

1.6 1.4 1.2 1 0.8 0.6 0.4 0.2 0 2007 2008 2009 2010 2011 Total Asset Turnover

Profitability Ratios
Gross Profit Margin This ratio assesses a firms financial health by revealing the proportion of money left from the revenues after accounting for the cost of goods sold. Gross profit margin serves as the source for paying additional expenses and future savings. The GP margin of the company is going down over the years from 24.62% in 2007 to 17.63% in 2011. Although the company has improved its situation from 2009, however it still needs to cut down its cost of goods in order generate more revenue. 2007 24.62% 2008 21.55% 2009 12.05% 2010 19.39% 2011 17.63%

Gross Profit Margin

30.00% 25.00% 20.00% 15.00% 10.00% 5.00% 0.00% 2007 2008 2009 2010 2011 Gross Profit Margin

Operating Profit Margin This is a measurement of what proportion of a companys revenue is left over after paying for variable costs of production such as wages, raw materials, etc. A healthy operating profit margin is required for the company to be able to pay for its fixed costs such as interest and debt. The company again is not doing well in this regard. It had a 19.41% operating margin five years ago but it has fallen down to 10.94% in the year 2011. This means that the companys costs are growing and it needs to cut down on them. 2007 19.41% 2008 15.91% 2009 6.93% 2010 12.53% 2011 10.94%

OPERATING PROFIT MARGIN

25.00% 20.00% 15.00% 10.00% 5.00% 0.00% 2007 2008 2009 2010 2011 OPERATING PROFIT MARGIN

Pretax Margin This ratio gives a companys earnings before tax as a percentage of total sales or revenues. The higher the pre-tax profit margin, the more profitable the company. The trend of the pretax profit margin is as important as the figure itself, since it provides an indication of which way the companys profitability is headed. As was obvious from the ratios above, the company is not doing well in its profits. The profitability of the company has gone down considerable from 2007 to 2011. The ratio has fallen from a 16.87% in 2007 to a 9.45% in 2011. This sharp decline in the revenue is not because the company hasnt been able to generate sales, it has actually been caused by the increase in the cost of sales. 2007 16.87% 2008 13.80% 2009 4.83% 2010 10.74% 2011 9.45%

PRETAX MARGIN
18.00% 16.00% 14.00% 12.00% 10.00% 8.00% 6.00% 4.00% 2.00% 0.00% 2007 2008 2009 2010 2011 PRETAX MARGIN

Net Profit Margin This is a ratio of profitability calculated as net income divided by revenues. It measures how much out of every rupee of sales this company is actually keeping in earnings. Net profit margin also helps to compare companies in the same industry as a better ratio means that a company has better control over its costs compared to its competitors. For Baluchistan Wheels, we again see the same trend as the cost of sales has increased, so there is a fall in the net profit margin over the years. It has fallen down from 11.07% in 2007 to 6.48% in the year 2011. 2007 11.07% 2008 8.59% 2009 3.34% 2010 6.06% 2011 6.48%

NET PROFIT MARGIN

12.00% 10.00% 8.00% 6.00% 4.00% 2.00% 0.00% 2007 2008 2009 2010 2011 NET PROFIT MARGIN

Operating ROA This is an indicator of how profitable a company is relative to its total assets. ROA gives an idea as to how efficient a management is at using its assets to generate earnings. The best way to analyze this ratio is comparing it with the previous years of the same company or the competition. Looking back at the year 2007, the company had a Net income around 20% of its total assets employed. In the year 2009, it went down to a low of 3% as the Net income became very low. The company has recovered to a 12.87% ratio but it still has not achieved the same levels that it had 5 years back. 2007 21.11% 2008 16.53% 2009 3.00% 2010 14.82% 2011 12.87%

OPERATING ROA
25.00% 20.00% 15.00% 10.00% 5.00% 0.00% 2007 2008 2009 2010 2011 OPERATING ROA

Return on Total Capital This is a calculation to asses a companys efficiency at allocating the capital under its control to profitable investments. The return on capital measure gives a sense of how well a company is using its money to generate returns. Comparing this ratio with the companys weighted cost of capital (WACC) reveals whether the invested capital was used effectively. Again for Baluchistan Wheels, we see the same trend. The returns generated from the capital employed, has been falling down from 28.62% in 2007 to 15.13% in 2011. 2007 28.62% 2008 22.81% 2009 7.06% 2010 18.79% 2011 15.13%

RETURN ON TOTAL CAPITAL

35.00% 30.00% 25.00% 20.00% 15.00% 10.00% 5.00% 0.00% 2007 2008 2009 2010 2011 RETURN ON TOTAL CAPITAL

Return on Equity This is the net income generated as a percentage of shareholders equity. Return on equity measures a corporations profitability by revealing how much profit a company generates with the money shareholders have invested. Again we see a downward trend in the returns of Baluchistan Wheels. The returns have fallen down to 11.74% in the year 2011- which shows an almost 50% decline in its ROE from the year 2007. 2007 22.34% 2008 15.98% 2009 5.14% 2010 11.21% 2011 11.74%

RETURN ON EQUITY
25.00% 20.00% 15.00% 10.00% 5.00% 0.00% 2007 2008 2009 2010 2011 RETURN ON EQUITY

Solvency Ratios
Debt to Asset Ratio Indicates what proportion of debt the company is using to finance assets. A higher ratio means the company is aggressively using debt to finance its growth. The benefit of having high debt to asset ratio is extra finance availability. On average capital intensive industry such as automobile industry has debt to equity ratio around 2. In case of Baluchistan Wheels, there is no debt. The company is totally relying on equity finance which is always expensive than debt. This will restrict the pace of growth that the company could have benefited from. 2007 0.02 2008 0 2009 0 2010 0 2011 0.01

DEBT TO ASSET RATIO

0.02 0.02 0.01 0.01 0.01 0.01 0.01 0.00 0.00 0.00 2007 2008 2009 2010 2011 DEBT TO ASSET RATIO

Interest Coverage Ratio It is used to calculate how easily a company can pay interest on its outstanding debt. The lower the ratio, the dangerous it is for the company to pay back interest payments. Ratio below 1 means, the company is not even generating enough revenue to pay interest payments. So a companys effort should be to have a high interest coverage ratio. In case of Baluchistan Wheels, ratio was 14.21 then went down to 3.87 in the year 2009 and later improved back to 14.72. The ratio is quite high due to low dependency on debt which ultimately leads to smaller interest payments. 2007 14.21 2008 16.76 2009 3.87 2010 13.14 2011 14.72

INTEREST COVERAGE
18 16 14 12 10 8 6 4 2 0 2007 2008 2009 2010 2011 INTEREST COVERAGE

CFFO to Interest Charges Ratio The ratio follows the same concept of how easily a company can pay its interest payments. However it is much conservative than interest coverage ratio as it compares interest payments with cash flow from operations. In case of Baluchistan, the ratio has decreased from 7.68 in 2007 to 4.135 in 2010 and again went down later to 3.393 in 2011, which indicates that the company is cash flows are going down. 2007 7.68 2008 6.11 2009 5.80 2010 4.13 2011 3.39

CFFO TO INTEREST CHARGES RATIO

10.00 8.00 6.00 4.00 2.00 0.00 2007 2008 2009 2010 2011 CFFO TO INTEREST CHARGES RATIO

CFFO to Total Liabilities This ratio calculates the proportion of cash flow from operating activities against total liabilities. It shows how much a company is focused towards generating operating cash flows using short term and long term liabilities. In case of Baluchistan, the ratio has reduced from 0.35 in 2007 to 0.14 in 2011. This shows a massive decline in efficiency of operating activities which the company will have to look into later on. 2007 0.35 2008 0.30 2009 0.42 2010 0.21 2011 0.14

CFFO TO TOTAL LIABILITIES

0.45 0.4 0.35 0.3 0.25 0.2 0.15 0.1 0.05 0 2007 2008 2009 2010 2011 CFFO TO TOTAL LIABILITIES

Debt to Capital Ratio This ratio helps us to study the capital structure of the company. The ratio presents debt as a percentage of total capital which includes debt and equity. It shows how much a company is dependent on debt financing. In case of Baluchistan Wheels, the company had only short term debts of small values which mean low debt to total capitalization ratio. 2007 0.03 2008 0 2009 0 2010 0 2011 0.01

DEBT TO CAPITAL RATIO

0.03 0.03 0.02 0.02 0.01 0.01 0.00 2007 2008 2009 2010 2011 DEBT TO CAPITAL RATIO

Cash flow Analysis Operating Cash flows This is the key source of a company's cash generation. It is the cash that the company produces internally as opposed to funds coming from outside investing and financing activities. If we see at the 5 years cash flow from operations, we see a declining trend, there was only one rise which was from CY08 to CY09. This means that year by year, company is generating lesser cash internally. The major reason of lower cash flows each year is decrease in revenues each. As you, in CY07, company revenues were Rs 209,268 but by CY11, they decreased to lowest point of Rs 34,274. Revenues basically decreased due to the inflationary pressure on certain elements of cost. Wheels industry was badly struck by pressure from the inflation which was translated in all the players in this market. Operating cash flows also decreased year by year due to increase in Benefits paid to the employees. It has almost doubled in the Period CY07 to CY11, reaching an amount of Rs 5037 in CY11 from Rs 2453.

Operating Cashflows
120000 100000 80000 60000 40000 20000 0 2007 2008 2009 2010 2011 Operating Cashflows

Free Cash Flows Free cash flow is an important evaluative indicator for investors. It captures all the positive qualities of internally produced cash from a company's operations and subjects it to a critical use of cash - capital expenditures. Discussing the five years Free Cash Flows of Baluchistan Wheel, we say that from year 2007 to 2009, company had very healthy Free Cash Flows, which meant that Baluchistan was in strong position to avoid excessive borrowing, had opportunities to expand its business, pay more dividends and to protect itself from hard times. But after CY09, we see a sharp decline in Free Cash Flows of the company. Reason here was that Baluchistan increased its investments, but its Net Operating Profit after Taxes was not that much to cater to this much high investment, In CY10, Baluchistan wheels had NOPAT of Rs 88,488 while the investment it made was of Rs. 76,426 hence such low levels of FCF. These FCF, reached the minimum point in these 5 years, where FCF went into negative. This increases the worries of Baluchistan Wheels as new investors would not be interested in investing in a company where the free cash flows are in negative. Current investors wealth instead of being maximized is now on risk.

Free Cash Flows

35,000 30,000 25,000 20,000 15,000 10,000 5,000 -5,000 -10,000 -15,000 -20,000

Free Cash Flows

2007

2008

2009

2010

2011

BALUCHISTAN WHEELS LIMITED

Duopoint Analysis
ROE Leverage ROA Net Profit Margin Total Assets Turnover Tax Burden Interest Burden EBIT Margin 2008 15.98% 1.47 16.53% 8.59% 1.27 0.62 1.10 0.13 2009 5.14% 1.36 3.00% 3.34% 1.13 0.69 1.53 0.03 2010 11.21% 1.32 14.82% 6.06% 1.41 0.56 1.09 0.10 2011 11.74% 1.31 12.87% 6.48% 1.38 0.69 1.08 0.09

DuPont analysis is an extended analysis of a company's return on equity. It concludes that a company can earn a high return on equity if: 1. It earns a high net profit margin; 2. It uses its assets effectively to generate more sales; and/or 3. It has a high financial leverage DuPont equation provides a broader picture of the return the company is earning on its equity. It tells where a company's strength lies and where there is a room for improvement. The company's leverage ratio is (Assets Equity), which is equal to the firm's debt to equity ratio + 1. This is a measure of financial leverage. The asset/equity ratio indicates a company's leverage, the amount of debt used to finance the firm. Dupont Analysis of Baluchistan Wheels Limited shows that its leverage is on constant decline. The company's Return on Assets (ROA) is (Return on sales x Asset turnover). ROA of this company decreased drastically from CY08 to CY 09, which means that during that period, management was not at all efficient at using its assets to generate earnings. But in the next year, Baluchistan wheels recovered and its ROA reached 14.82% in CY10 from 3.34% in CY09. Over all efficiency of the company has been good over these 4 or 5 years. The company's Asset Turnover is (Sales Assets). Asset Turnover did not have a specific change, first it decreased in CY09 showing the decrease in efficiency of at using its assets in generating sales or revenue. Then as the sales grew in next Financial Year, the Asset turnover also improved and reached a mark of 1.41 in CY10, which is the highest in last four years.

The company's Tax burden is (Net income Pretax profit). This is the proportion of the company's profits retained after paying income taxes. On average, Baluchistan Wheels retained 0.64 of its profits. The lowest were retained in CY10 as profit was generated hence which increased the amount of tax. The company's Interest burden is (Pretax income EBIT). Interest burden of Baluchistan Wheels has been on the lower side, as it was 1.10 in CY08, 1.09 in CY10 and 1.08 in CY11. This is a very good sign, and is healthy for Return on Equity. Interest burden did reached a high point of 1.53 in CY09 but they were able to contain it. EBIT Margin is (EBIT Sales). This is the operating income per rupees of sales. EBIT Margin tells how the company has grown overtime. By looking at the last 4 years ratios of EBIT Margin what we see is that EBIT Margin has actually decreased over the years. It reached its lowest point in CY09 of 0.03, which did improved in CY10, but overall, the trend has been declining.

Conclusion
Critical Success Factors: The demand for automobile will keep on increasing due to population and GDP growth from which BWL will solely benefit from as there are no major competitors in the market. In the past a dip in automobile industry has affected BWL very seriously as BWL whole sales depended on local industry. To diversify and to open its horizons to new opportunities, BWL has redirected its focus towards exports. At present BWL exports are not of significant value but are soon to escalate. The business operates in a very stable environment with very few variables affecting it. The customer clienteles consists of automobile companies with whom long term agreements are signed. Similarly to cope up with electricity prices, the business has installed generators and has less energy consuming equipment installed. BWL has installed state of the art machinery and have associated itself with Quality Assurance Organizations so as to produce high quality wheels and to satisfy its industrial customers. By looking at the ratios we see that over the period of 5 years, all ratios have remained in the green area apart from 2008-2009 fiscal year due to dip in automobile industry as a whole. By looking at the common size statements, we see that the

profits, assets compared to sales are consistent which shows that the management has strict control over its operations in terms of expenses and assets. This also helps BWL in making long term decisions.

Recommendations: I think the company is doing very well in terms of profit. The company has acquired new machinery and has expanded its operations so as to meet the growing demand and not to lose market. I think BWL should try to approach the international market through these companies for example Toyota and Honda and distribute wheels to these companies outside Pakistan as well. To do so BWL will have to meet the high quality measures before it can ensure its place. Secondly if we look at the director/management BOA we see that in past 5 years there has been no changeover. This creates problems in the long run as the directors have a certain mindset and after working in an organization for so many years, loose enthusiasm and create a monopoly so as to prevent others. Thirdly BWL shares are not traded frequently in the market because of which we see beta correlation very low and negative in one year. This means people dont prefer to buy BWL shares. The company needs to improve their image in the market.