Aftab Automobiles Limited - Credit Rating Agency of Bangladesh

CRAB RatingsCorporateCredit Rating ReportAftab Automobiles LimitedRating Outstanding (14 January 2010)1.0 RATIONALELong Term : AA 3Valid Till : 28 February 2011Analysts:Nur Elahee MollaFinancial Analystnur_elahee@crab.com.bdQuazi Towfique UddinFinancial AnalystFinancial HighlightsBDT in Million2008 2009Turnover 1851.77 2124.64Gross profit 271.10 391.33EBITDA 154.39 274.09Current assets 1797.12 2001.27Total assets 2236.32 2438.88Current liabilities 1544.56 1506.44Long term liabilities 117.10 26.93Shareholders equity 574.66 905.52Gross profit margin 14.64% 18.42%EBITDA to interest 3.14% 3.02%Return on asset 2.70% 3.17%Current ratio (times) 1.16 1.33Quick ratio (times) 0.76 0.84Debt ratio 74.30% 62.87%2500.002000.001500.001000.00500.000.002004 2005 2006 2007 2008 2009RevenueGross profit margin25.00%20.00%15.00%10.00%5.00%0.00%Credit Rating Agency of BangladeshLimited (CRAB) has assigned ‘AA3’(Pronounced double A three) rating inthe Long Term to Aftab AutomobilesLimited (hereafter referred to as AAL orthe Company) in view of theperformance of the Company for thebusiness year 2009 and other relevantinformation.Corporate entities rated AA in the longterm belong to ‘very strong capacity’cohort. Such companies have verystrong capacity to meet financialcommitments, judged to be of very highquality and are subject to very low creditrisk.CRAB has performed the present ratingassignment based on audited financialstatements of August 2009 and otherrelevant information. The rating alsotakes into account business profile, pastrecord and trend of operatingperformance, balance sheet strengthand loan payment history of theCompany.Aftab Automobiles Limited wasincorporated in 1967 as a private limitedcompany in name of East PakistanAutomobiles Ltd. It was named as AftabAutomobiles Limited in 1972 andtransformed into a public limitedcompany in 1981. Overall business ofthe Company is well diversified into fivebusiness units named Assembling Unit,Body Building Unit, Paint Unit, BatteryUnit and Furniture Unit where theAssembling Unit is the oldest and largestPage 1 of 3

CRAB RatingsCorporateunit of the Company contributing on an average 56.23% of total revenue over the fiveyearperiod ended 2009. The rating considers the contractual right of assembling Hinochassis from Navana Ltd which has dealership of Hino chassis from Toyota TsushoCorporation (Japan). The overall sales and marketing along with recovery activities aredone through Navana Ltd which eventually keeps the related risk at low. The overallactivities including operational, selling and collection functions of the Body Building Unitare also aligned with the activities of the Assembling Unit. Therefore strong brand nameHino and the overall services of the Company facilitate continued growth of revenue ofthe Company. The brand name of ‘Navana’ also facilitates the Company to achieve soundgrowth of Battery Unit and Furniture Unit which eventually resulted in sustained revenuegrowth of the Company over the years.Total revenue of the Company stood at BDT 2,124.64 million in 2009 which was BDT1,851.77 million in 2008 registering a growth of 14.74%. The Company reported anaverage sales growth of 13.84% over the five-year period ended 2009 where that ofCGSD was 13.19% during the same period. The rating considers the expected growth inrevenue of the Company after implementing the proposed BMRE project of expandingthe operation of the Assembling Unit and Body Building Unit. However the cost of goodssold had a decreasing trend with slight variability which was on an average 84.31% ofsales. The gross profit margin of the Company was sound at a stable rate over the lastfive years registering an average rate of 15.69%. The Company’s earnings were 3.17%of its average assets and 10.01% of its average equity in 2009 compared to 2.70% and10.13% respectively in the previous year. The overall profitability of the Companyrevealed better position in 2009.The Company maintained current ratio of less than 1.5 times over the last five yearsregistering an average rate of 1.24 times. Both the current and quick ratio of theCompany was reasonably stable over the same period. From the analysis of its liquidityratios it is found that the Company had more inventories over year which increased from26.45% of assets in 2007 to 30.24% in 2009. The Company’s financials are quitesusceptible to receivable collection as it has large amount of account receivable out ofwhich 32% remained outstanding for more than six months. Although the cashconversion cycle of the Company improved from 265.24 days in 2008 to 251.35 days in2009 it was still high compared to its previous trend.The leverage position considering all liabilities reflects moderate debt based capitalstructure of the Company. The debt ratio of the Company has a decreasing trend from83.44% in 2005 and in 2009, 62.87% of the assets were financed through externalsources considering all liabilities including 120 days deferred payment of LC facility owedto Toyota Tsusho Corporation (Japan). The debt ratio considering only long term debt isnegligible (1.10%). The rating also considers present BMRE plan of issuing BDT 1,800.0million Preference share which will be converted into Ordinary Shares on 31 May, 2010.However the Company has planned to repay debt of BDT 500.0 million and to meet theworking capital requirement arising from the BMRE project with the fund infused throughPreference Share. Therefore the decreasing trend in the debt ratio over the years alongwith the proposed issue of fully convertible preference share which will enhance theequity base of the Company keeping the credit risk at low, are considered whileassigning the rating.Page 2 of 3

CRAB RatingsCorporateThe rating also considered the listing of the Company in both the bourses of the country,composition of Board, effectiveness of the Board, trend of dividend declaration over theyears, sponsors’ involvement with wide range of companies. Total shareholder’s equity ofthe Company stood at BDT 905.52 million in 2009 which was BDT 574.66 million in 2008registering a growth of 58%. The equity base mainly increased in the form of retainedearnings arising from profit on investment in shares (BDT 242.56 million). However afterconversion of the proposed issue of fully convertible Preference Share the equity base ofthe Company will be increased largely.The rating also considers the labor retention success, technology used, raw materialprocurement efficiency and quality control system to maintain customer confidence. Thebrand image of ‘Hino’ and ‘Navana’ along with well diversified business of the Companywill help to keep its success trend. The management of the Company is not likely to poseany threat for Aftab Automobiles Ltd as it is an old and established organization havinggood succession planning. The IT infrastructure and quick flow of information regardingproduction, labor, stocks and sales related issues are also considered while assigningrating which eventually help the Head Office to effectively control and monitor theoperation of the factory.Page 3 of 3