Loads Limited — which claims to be ‘one of the largest auto parts manufacturers in the country’ has announced an Initial Public Offering — which marks just the second new issue at the Pakistan Stock Exchange this year.

All by itself, Loads with three plants still looks like a company of modest size. On Dec 31, 2015, the company held Rs3bn in total assets, including Rs1.2bn marked as ’stock-in-trade’. Yet it is a part of the giant conglomerate operating in diversified fields. Associated group companies include: Treet Corporation; Packages Limited and IGI Insurance, all having a strong presence at the country’s stock exchange.

Among its main clientele, Loads Limited lists Pak Suzuki Motor Company and Hinopak Motors Limited to which the company provides radiator, muffler and sheet metal components. Indus Motor Company and Honda Atlas Cars are provided muffler and sheet metal components. The company caters to the needs of radiators to Millat Tractors Limited for its Massey Ferguson tractors.

The financial performance of the company leaves little to be desired. Over the last four years, the company has achieved revenue at a compound annual growth rate of 17.2pc

Auto sector analyst, Ali Khan at Alfalah Securities says: “The company primarily manufactures exhaust systems for Original Equipment Manufacturers (OEMs) and is the sole supplier of exhaust systems for Indus Motors and Honda Atlas cars, while being the major supplier of Pak Suzuki Motors”.

The analyst adds that the exhaust systems fetch the highest margins and the company has an annual capacity of 0.150m units, which currently operates, at 90pc utilisation level. This segment contributes 63pc to the company’s revenues.

Loads Limited now plans to issue 50m new shares at a floor price of Rs15 per share following which the total share capital of the company would increase to Rs1.250bn, from Rs750m, currently. Of the present paid-up capital, sponsors Treet Corporation Limited holds 20.82pc, while Syed Shahid Ali, chairman of the company, has the majority stake in the company. Market watchers foresee the post-IPO ownership structure as shareholding: Treet Corporation at 12pc of the stock; sponsors and directors having at 47pc and free float at 40pc.

Initial offering of 35.6m shares, which would form 71.25pc of the entire offer, would be made available to institutions and High net worth individuals (HNWI) through a ‘book building’ process. The general public portion of the issue would comprise 14.4m shares (28.75pc of the total issue).

The bidding days for book building are Sept 6 and 7. The minimum price per share (floor price) has been set at Rs15, which is at a premium of Rs5 per share.

Based on the ’strike price’, the public subscription would open for two days on Sept 28 and 29. Analyst Faisal Shaji at Standard Capital Securities calculates: “The latest book value prior to the new issue is Rs18.83 per share as per 9MFY16 reporting. The company’s net earnings stood at Rs75m”.

Loads Limited noted in its ‘Prospectus’ released on Aug 31 that at the floor price of Rs15, the issue would generate Rs750m, which would be allocated as follows: For expansion and modernisation Rs550m (73.33pc) and the remaining Rs200m (26.67pc) to be utilised for working capital.

The financial performance of the company leaves little to be desired. Over the last four years, the company has achieved revenue at a compound annual growth rate (CAGR) of 17.2pc, which yielded net profit at CAGR of 8.3pc.

Yet analyst Ali Khan at Alfalah Securities muses: “Despite a positive outlook for the company, we caution that the management is rather over-optimistic in terms of its sales growth forecast in assuming a 25pc industry CAGR (FY16 to FY20)”.

The analyst feels that the industry was likely to experience an average per year growth of 10pc over the next five years. “However, if a new taxi/Apna Rozgar Scheme is announced, it could drive up Loads’ sales for FY 17/18 considerably”, Ali acknowledged.

For Loads Limited, competition could be an issue going forward. At the moment, there are about 375 Tier-1 auto parts manufacturers (APMS) and 1,600 Tier-2 suppliers, who comply with global standards to produce localised auto parts that are being used in the assembly of multinational vehicles in the country.

According to the Pakistan Association of Automotive Parts and Accessories Manufacturers (PAMA), cars, heavy vehicles, tractors and motorcycles assembled in the country use almost 55pc to 70pc of the auto parts that are manufactured by the local APMS.

The management of Loads Limited said it was optimistic that the auto industry sector in the country would grow both horizontally and vertically. Yet it is difficult to overlook the ‘risk factors’ associated with the business, which relates to a decrease in demand for the company’s products resulting from lower than anticipated growth in the auto industry.

The other major risk involves: adverse foreign exchange movement. However, analyst Hamza Kamal at Shajar Capital says: “The company imports 97pc of the raw material of which, as per management 55pc is imported from Japan. Regardless, the company’s ‘cost plus pricing strategy’ shields it from adverse foreign exchange movements”.

Published in Dawn, Business & Finance weekly, September 12th, 2016