The company supplies to all of the major tractor and commercial vehicle manufacturers including its associate company Millat. In the commercial vehicle segment, its customers include Hino Pak Motors, Master Motors, Afzal Motors and Ghandhara group. The company procures its raw materials from local as well as imported sources and some of its primary inputs include pig iron, coke, cold dust, core coating, core adhesives etc.
Millat Tractors owns the company with 46 percent shares of Bolan Casting and it also happens to be the company's biggest client. Nearly 31 percent of the shares are held by the public, aside from which there aren't any notable shareholders. More than 20 percent of the shares are spread across foreign investors, company's directors, banks, DFIs, insurance companies, joint stock companies and others.
Financial and operational performance
The tractor industry is Bolan's bread and butter, which itself is dependent on the agriculture sector of Pakistan, since exports are few and far in between. Bolan's financial performance has been closely linked to the growth of the tractor industry which has seen its fair share of ups and downs. Though agriculture is a major driver for the economy, farmers' ability to purchase tractor has been dependent on the affordability factor. During the times when the government offered tractor schemes or lower the sales tax on tractors, sales flourished. In times of high sales tax, volumes dropped. Bolan's sales have followed suit.
Bolan's capacity utilization was high until FY14 when the first time the company incurred a loss for the period. This was when the government had raised GST to 17 percent after bringing it down to 5 percent in 2012. The GST stayed at 17 percent until 2015. Bolan's utilization graph pretty much follows the same cycle. During 2016, when utilization dropped massively to 64 percent, the agriculture sector was thwarted by poor crop production. The impending government schemes that were going to be announced by two provinces never saw the light of the day.
During FY17, government policies boasted the entire value chain. There was a reduction in sales tax to 5 percent for tractors, subsidies to fertilizers; pesticides and energy were offered while agricultural loans were given a reduced mark-up. These bolstered demands for Bolan Casting and the company saw its utilization reached 88 percent. Revenues also grew and continued this path until FY18, which has historically been the best year for the company from the top line as well as margins perspective.
The company's costs are sensitive to fuel prices, raw material costs and the rupee-dollar parity. Though costs of sales per unit during FY18 grew, the company's overall demand remained robust, this safeguarded its margins. While the company spends 53 percent of its costs into raw material, nearly 20 percent of its total costs go into salaries and wages of factory workers while 14 percent of the costs go into energy expenditure including fuel, power, coke, diesel and oil.
Demand for tractors, the movement in global commodity prices of raw material such as pig iron, coke and adhesives and any others that Bolan imports, the fluctuation and further depreciation of the rupee against the Greenback, and fuel prices will continue to be pivotal for Bolan's future profitability. Though it has a segment that provides parts to commercial vehicles, it is not a very fleshed-out part of the business and could do with more investment.
Recent financials and outlook
After a phenomenal year that was FY18 for Bolan Casting, in the first quarter for FY19 ending Sep-18, the company is not doing so well. Hit badly by the lower demand for tractors, increase in input costs exacerbated by the falling value for rupee, the company incurred a loss during the quarter. Gross margins plummeted to 0.3 percent from a decent 15 percent this quarter last year.
The slowdown in the economy has affected tractor sales significantly-with sales number dropping by 13 percent in 1QFY19, according to data reported by Pakistan Automotive Manufacturing Association (PAMA). Parts manufacturers like Bolan Casting were inevitably going to bear the brunt of this.
This may be the first time since FY14 that the company will incur losses. It has managed to more or less maintain its profitability. Slow demand of tractors is only one of the factors for margins taking a nosedive. Higher costs of production may be a greater contributor. Inputs like iron that are imported have globally seen prices go up, while the rupee devaluation has made imports all the more expensive. The company could cut down on administrative related expenses and improve plant efficiencies or energy conservation but these will only help so much. Since the company does not have scale, it will always remain highly susceptible to costs of production.
On the other hand, demand is also deteriorating so the company cannot raise prices too much to offset the effect of higher costs. If tractor sales continue to take a beating, Bolan Casting will continue to incur losses through the fiscal year. Evidently, in 5MFY19, tractor sales have dropped by 13 percent year on year, and by 41 percent between Oct-18 and Nov-18. Local tractor manufacturers have also been complaining about used tractors that are flooding the market and giving them competition.
Bolan casting should think about diversifying into other parts, which it can easily upgrade to, and which can cater to other segments of the automotive industry. This expansion can come into the allied engineering and commercial vehicle segment where a handful of new players are entering the assembling space. Moreover, if the tractor industry can start exploring exporting markets (which Millat Tractors is doing to an extent) instead of only relying on local markets, it would ramp up business for itself and for parts manufacturers.
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Bolan Casting (Financial performance in 9M)
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Rs (mn) 1QFY19 1QFY18 YoY
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Sales 496.2 488.2 2%
Cost of Sales 494.6 415.1 19%
Gross Profit 1.5 73.2 -98%
Distribution costs 15.4 14.8 4%
Administrative costs 16.2 16.2 0%
Other operating expenses - 2.8 -100%
Other income 2.6 1.1 141%
Finance cost 7.3 3.4 118%
(Loss) Profit before tax (34.7) 37.1
Income tax 8.2 (9.7)
( Loss) Profit after tax (26.5) 27.4
Earnings per share (Rs) -2.31 2.39
GP margin 0.3% 15%
NP margin -5% 6%
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Source: Company accounts
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Pattern of Shareholding (as on June 30, 2018)
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Categories of Shareholders %
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Foreign investor 0.86%
Directors, Executives and family 3.20%
Associated Companies 46.66%
Millat Tractors 46.26%
Investment Companies 4.26%
National Investment Trust 4.26%
Joint Stock Companies 1.69%
Banks, development finance institutions, 9.59%
non-banking finance companies, insurance
companies, takaful, modarabas and pension funds
Insurance Companies 0.34%
General Public 30.72%
Others 2.69%
Total 100%
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Source: Company accounts