1.

0 Thal Limited
1.1 Introduction
Thal Limited (formerly Thal Jute Mills Limited) enjoys the distinction of being the pioneer
industrial project of the House of Habib. The project was launched in 1966 and
incorporated as a public limited company, which commenced production in 1966. The
company is engaged in the manufacture of jute goods and assembly and manufacture of
engineering goods consisting of auto air conditioners, wire harness and heater blowers.
The jute factory is at Muzaffargarh and engineering operation is at Karachi.
The Jute Mill is located at D.G. Khan Road, Muzaffargarh, Pakistan and is engaged in the
manufacturing of A. Twill Sacks, B.Twill Sacks, Coffee Sacks, Sugar Sacks, Heavy Cees,
Light Cees, Hessian Cloth, Hessian Bags (ordinary/natural white), Jute Yarn & Twine used
mainly for packing of wheat, rice, cotton, etc. The Jute Division is one of the largest
employers of skilled and unskilled workers with strength of more than 3,300 people. It
enjoys excellent Labor - Management relations which have resulted in a cordial and
harmonious working environment at the Mills.
The Company diversified its business activity into the assembly and manufacturing of auto
air conditioners in 1995-96 by signing a technical license agreement with Denso
Corporation, Japan. The Engineering Division accomplished the deletion target of 50% set
by Ministry of Industries, Government of Pakistan. The plant has production capacity of
40,000 units per annum on single shift basis. The division is supplying Air Conditioners to
the auto manufacturer i.e. Indus Motor Company Ltd. & Pak Suzuki Motor Co. Ltd. Further
expansion in the Engineering Division was made into Wire Harness Project, which too has
been successfully launched. The Engineering Division has made investments in assets
worth over Rs.100 million and attained sales turnover of Rs. 1.3 million

1.2 Corporate Vision

Set up and operate viable businesses in different industrial & trading sectors in a manner
that:

 We are either # 1 or # 2 in turnover & returns in the industry;

 We are able to service all the stake-holders in a market-competitive manner;

 We have an export portfolio of products

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1.3 Vision
Jute Division
We, at Thal Jute, are proud to be a leading manufacturer of good quality and diversified
products both for local and export markets at competitive prices, always aspiring to give
true value to our customers. This is achieved by a team of highly trained and motivated
professionals whose sole aim is to satisfy all stake-holders.

Vision - Engineering Division

Recognized internationally as a world-class manufacturer of engineering products with
high entry barriers. Making superior efforts to provide tailored solutions to our customers,
ensuring stake-holders interest and being a good corporate citizen.

1.5 Mission Statement

Our mission is to set up and operate viable businesses in sectors, identified by the
Executive Committee and Board of Directors, in a manner that: They are either # 1 & 2 in
turnover & returns in their industry; Service all the stake holders in a market-competitive
manner; Have an export portfolio of products. Our mission is to be the # 1 Jute products
manufacturers in Pakistan in terms of turnover, efficiencies and margins. We will search
out new technologies, products and markets to maintain our position of most efficient
producer, highest turnover and sustained good returns

1.6 Social Responsibility

In 2004-05 Company contributed a sum of Rs 3.304 million towards community welfare
during the year; in2003 – 04 it was Rs 2.086 million. Thal limited has been trying to fulfill its
obligations to the community and society and have provided assistance to hospitals and
schools, especially for female education. Contributions were also made for Tsunami
Victims.

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1.7 Financial Performance
Thal limited has been growing over past ten years. The Earning per share has been
climbing steadily from since 2001 which is a successful indicator of the ultimate goal of a
company “maximizing share holder’s wealth”.

Earning Per Share 1996-2005

30
27
24
21
18
EPS

15
12
9
6
3
0
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
Years

1.8 Assumptions
a. WACC has been assumed at 7.1% for all years after 2005

b. Long term growth rate has been assumed as 5% for business valuation

c. Average of short term and long term interest rate has been taken

d. Various heads under financial statements of Thal Limited has been combined to
convert into Proforma Financial Statements of tool kits.

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2.0 FINANCIAL STATEMENTS

2.1 Analysis of Financial Statements

Financial Statements of Year 2003-04 and 2004-05 of Thal Limited were down loaded and
are attached as Appendix A. The calculations on Financial Statements are attached as
Annex- A. The analysis of financial statements reveals that;

Sales increased 32% from 2004 to 2005 in-comparison to an increase of 29% in 2003-04.
This increment is due to an increase in export orders of Jute operations and a tremendous
growth in automotive industry which directly affected the sales of Thal Limited
Cost of Operation also increased correspondingly. It rose by 31% in comparison to 32% of
2003-04. The main reason for increase was increase in cost of raw jute and labor wages.

Earning before interest and taxes increased by 26% in 2004-05. The same increased
by 14% in 2003-04

Free Cash Flow is an important indicator of company’s performance. FCF is 46 million

Rupees in 2004-05 whereas it was -69 million rupees in 2003-04. Since NOPAT is positive
in both years there is no indication that company may be in trouble. Analysis of Net
Working Operating Capital and Total Operating Capital shows increase of 44% and 36%
respectively from 2003 to 2004. An increase in investments in assets has led to a negative
FCF in 2004 where as an increased NOPAT and reduced investments in assets led to a
positive FCF in 2005.

Earning Per Share increased from 22.6 Rs/Share in 2004 to 29.6 Rs/Share in 2005, an
increase of 24% whereas the same was 20% from 2003 to 2004.
Company’s share has been climbing since 2003. In 2003, the stock’s lowest price was 68
Rs whereas the highest was 107 Rs. Retention Ratio in 2003 was 66% whereas the ratio
increased to 72% in 2004 and than 78% in 2005 which led doubling of share price within a
year. The company has increased its retained earnings by almost 28% every year since
2003, which shows its commitment towards expansion and future growth by relying more
on retained earnings than debt and new equity (which have not been increased in recent
years)

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3.0 Ratio Analysis
Details on ratio analysis are attached in Annex B

3.1 Liquidity Ratios

Company’s current ratio has gotten better by 40% since 2003. Its Quick ratio have
become greater than 1 (1.29) in 2005 due to an increase in cash and Accounts receivables
(also an improvement of 40% over 2004 and 2003). This signifies that company has a
strong liquid position can handle its current liabilities.

3.2 Asset Management Ratios

Company’s inventory turnover ratio has increased by 14% since 2004. It is difficult
to say how good this really is since industry average is not available. However, it is
assumed that an increase in this ratio is good for the company and shows management’s
ability to minimize inventory costs as well. DSO have increased since 2003 from 18.65 to
26.77 in 2004 and than to 40.2 in 2005. This situation casts a doubt on the company’s
Liquidity ratios because inventories make up around 50% whereas accounts receivable
make up around 25% of Current Assets. An increase in DSO reflects that customers are
not paying on time and management needs to bring it back in line.
Fixed Asset Turnover ratio is 18.61 in 2005 whereas it was 15.45 in 2004 and 12.01 in
2003, an increase of 17% and 22% relatively. Fixed assets are employed properly. Total
assets turnover has reduced by 4% since 2004 but overall there is a cumulative increase
of 5% since 2003 which shows that Total assets are employed properly.

3.3 Debt Management Ratios

The company’s Debt to Asset ratios are a paltry 10% and 11% in 2005 and 2004.
The company also did not acquire any long term debt in 2005. Due to strong TIE ratios
and EBITDA coverage, the company should not have to face any problems should it chose
to increase its debt ratio in capital structure.

3.4 Profitability Ratios

Thal Limited has had a 12% Profit margin on sales for last three years. It has
neither increased nor decreased. BEP has also stayed around 38% since 2003. ROA has
average 25%. However, ROE has been decreasing from 44% in 2003 to 36% in 2004 and
34% in 2005. This decrease is mainly due to increase in total common equity since 2003
(Retained earnings have increased at an average of 29% over last two years). Although, it
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is significantly more than the cost of equity (Ks = 7%), yet the management needs to take
some actions to maintain if not ROE in coming years.

3.5 Market Value Ratios

Price to earning ratio has a fluctuating trend. It decreased by 23% in 2005
whereas it improved by 33% in 2004. Price to book ratio of the company is in good
shape as it has remained above 1 all these years. This ratio has also improved in
2004. The dividend pay out ratio is in the range of 25% percent per year. This
means that the company is not paying all of its net income as dividends. This
impact can be shown on the shareholder’s equity, which is also increasing over the
last three years. This leads to the result that the company is not paying all of its net
income as dividends instead it is using the rest of the income to purchase fixed and
other assets for the company.

4.0 The Cost of Capital

The calculations for WACC are as under
D1 = D0 (1+g) = 6.5(1.04) = 6.75
P0 = 203 Rs
g = 4%
Wd = Total Debt / Total Assets = 0.10
Wd + Ws = 1  Ws = 0.90
ks = (D1 / P0 )+ g = 7%
Kd =Fin Charges/Debt 2005 =10%
After Tax Cost of debt=kd (1-T) =0.11*0.65 =0.062
WACC = Wdkd (1-T) + Wsks =0.1*0.062 + 0.9*0.07 = 0.069 ~ 7%

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5.0 Financial Forecasting & Business Valuation
The detailed calculations are attached as Annexure C, D and E

5.1 Analysis of Forecasted Statements and Cash flows

Analysis of forecasted financial statements reveal that Thal Limited will be doing
quite well in future. In forecasted financial statements of three years 2006, 2007,
and 2008 the company has generated surplus funds which could be used to retire
an already low debt or used to buy short term securities.
Dividend will grow at a steady rate of 4% and retained earnings will grow at a rate
0f 26%, which shows that company will continue to grow by utilizing its retained
earnings rather than relying on new equity and debt
Ratio analysis shows that current ratio will get better from 3.3 to 3.7 in 2005 to
2006. This shows an increasing liquidity of company to be able to handle its current
liabilities. Inventory turn over ratio will improve by approximately 20% but the
problem will remain with Days sales outstanding (DSO) which continues to cast
doubt on the current ratio by itself. Accounts receivable makes up at an average of
25% of the total current assets. If the DSO continues to increase the company
may soon start facing problems in handling its current liabilities.

TATO reflects that assets will continue to be deployed sufficiently and debt ratio will
increase to 25%. However the Profit margin will continue to hover around 11%.
ROA and ROE will also maintain around 25% and 33% respectively which
indicates that company will stay stable for years to come.

Company’s cash flow situation will continue as Free Cash Flows will keep
increasing which indicates a continuously better position of company. With these
forecasts it is assumed that company will grow at a steady pace of at least 5% after
2008 as well.

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