The Pakistan Credit Rating Agency Limited / Vehicle Tracking
1. Ratings
§  Initial
§  Adequate credit quality / Entity / Initial
Long Term / BBB
Short Term / A3
2. Profile
§  Established in 2005
§  Branches and installation centers located in 10 cities
§  Strong recovery rate
§  Strategic investments in associated companies / 2.1  United Track System (Private) Limited (UTS) is a part of the United International Group (UIG). Established in 2005, UTS is a technology based company primarily dealing in vehicle tracking to provide fleet management and theft protection services in Pakistan. UTS, head quartered in Lahore caters to 10 cities via 6 branches and 4 installation centers. Its service coverage area spreads across all areas receiving mobile signals in Pakistan. UTS tracks vehicles by installing tracking devices to the car. The device uses Global Positioning Systems (GPS) to determine the precise location of the vehicle and transmits data via GSM and GPRS technology to UTS’s servers.
2.2  UTS’s product slate consists of only four products. However, the technological nature of the device can be adjusted to gather different type of data such as vehicle speed, fuel consumption, and other measurable parameters. This enables the company to customize its services to suit client needs. The company had 16,359 active devices as on end Dec-13.
2.3  The company’s recovery rate was reported at 82% as on end Dec-13 (end Jun-13: 84%; end Jun-12: 87%). This is close to the average recovery rate in the world ~85%. Due to the company’s strong track record and association with UIG, UTS has been able to attract few institutional/corporate clientele. These include big names such as Bank of Punjab, Habib Insurance, and Atlas Honda among others.
2.4  Strategic Investments: UTS has sizeable equity investment in other group companies (PKR 106mln; 86% of equity at end Mar-14) including SPI Insurance Company (27%), United Insurance Company (18%) and Apna Microfinance Bank Limited (2%). The company derives synergies from both insurance companies in terms of installation of tracking devices in vehicles insured by the company. The company plans to increase its holding in its associated companies in the near term.
2.5  M/s Sarwars Chartered Accountants are the external auditors of the company. They are listed as having satisfactory Quality Control Review by the Institute of Chartered Accountants of Pakistan. The auditors expressed unqualified opinion on audited financial statements of the company for the year ended June 30, 2013.
3. Ownership
§  Majority ownership by UIG
§  Cross holdings amongst group companies reduces structural ownership transparency
§  Ultimate sponsor – Mian Shahid / 3.1  The ownership of UTS is held by a mix of corporate, financial institutions and individuals. UIG through group companies owns majority stake (74.6%) in the company. However, various cross holdings amongst group companies reduces transparency in determining ultimate ownership of the company. Rest of the shareholding (25.5%) is held by friends and family.
3.2  The man at the last mile has been identified as Mian Shahid. Mian Shahid via direct and indirect ownership in UIG group companies has 55.6% stake.
3.3  Mian Shahid established UIG in 1999. The major focus of UIG is towards Financial Institutions (insurance, microfinance and risk management). UIG’s other interest include IT, agriculture and business consultancy. Insurance business is the main forte of the group, while the rest of the businesses are of limited scale.
4. Governance
§  Two member board
§  Oversight through committees / 4.1  The overall control of the company vests in a two member Board of Directors – the sponsor and his wife. Mian Shahid being the Chairman. They are supported by two committees (Audit and Human Resource & Remuneration) consisting the sponsor’s advisory team and a few key management personnel. The audit committee spearheaded by Mr. Rahat Sadiq (Vice Chairman, UIG), and Mr. Khwas Niaizi (Chief Executive, UIG), ensures appropriate financial reporting, while maintaining effective risk management and internal control systems. The HR&R committee, chaired by Mian Shahid, aids in the governance of the company by monitoring HR practices and plays a pivotal role in appointment of key management. A brief profile of the BoD members, and the terms of reference of the committees are attached as Annexure I.
4.2  Though, UIG provides oversight to UTS, as suggested by the involvement of the sponsor and his advisors in the governance committees of the entity. However, documentation of the minutes needs improvement.
5. Management
§  Experience top management
§  Two management committees / 5.1  Mian Shahid holds the position of Chief Executive Officer. He is supported by a small but experienced management team. To improve efficiency and avoid conflict of interest, the operations of the company are divided primary and secondary functions. These departments along with support functions (accounting & finance, and audit) report directly to CEO. Mr. Munir Ahmed (Joint Director) is responsible for primary operations including sales & marketing, control room, IT, R&D and others. Mr. Tanveer Bukhari (General Manager) looks the secondary operations of the company which include recovery of stolen vehicles, installation and customer service. Segregation of sales & marketing department from operations may improve the structure of the organization as the company grows. A brief profile of the management and the group’s organizational structure is enclosed as Annexure II.
5.2  The CEO manages the operations of the company with the help of two management committees; Executive committee and Business Strategy Committee. Similar to the committees of the BoD, these committees constitute sponsor’s advisory team and a few key management personnel. The Executive Committee is responsible for overseeing and directing the activities of the company. While the Business Strategy Committee formulates the strategy of the company along with identifying new business opportunities for the company. This committee analyzes the investment portfolio of the company. Details of the committees are also enclosed as Annexure II.
6. Systems & Controls
§  Multiple vendors
§  In- house developed system software
§  Dependent on mobile network / 6.1  UTS two has vendors from which it purchases tracking devices – Go-Safe and Teltonika. Go-Safe and Teltonika are international brands from China and Lithuania, respectively and are used in over 100 countries worldwide. Both brands have established offices in Pakistan providing quick access to inventory as compared with industry players who import trackers directly. Multiple vendors also help in reducing concentration risk in terms of over dependency on one vendor. Currently, around 70% of the active trackers belong to Go-Safe.
6.2  These tracking devices transmit geo-positioning data using satellites; transfer it to UTS’s servers via GPRS. In case GPRS is not available at the trackers location, the information is passed on to the server over SMS providing high coverage area. In case the tracker travels to a grey area (mobile signals not available), the tracker continues to collect locational data and transmits it to the UTS server once a signal is received. The tracker can save up to 7,000 locations while in grey area.
6.3  UTS uses in-house developed Agent Console, that uses data transmitted by the trackers and molds it together on a single screen; making it efficient to use at the Control Room. The control room is divided into three divisions; complaint resolution, alerts, and installation testing. Each division receives special training for its defined function. The alerts division is operational 24/7.
6.4  Given UTS’s field of business, its dependence on strong technology infrastructure is very high. UTS should maintain online connectivity with its servers to provide service to its customers. Consequently, UTS has established connectivity with its server on dual medium via fiber (primary) and radio link (back-up) with an auto failover switch. Though this model provides almost 0% downtime connectivity, it is vulnerable to situations when PTA disables mobile connectivity due to security reasons. UTS uses cloud technology to create virtual replicas of its servers, making disaster recovery smooth. Daily back-ups are maintained for database sites.
6.5  MIS reporting: Apart from the daily reporting, a detailed monthly MIS, including performance reports and financial statements, is generated for top management.
7. Business Risk
§  Positive sentiments in the industry
§  Concentration in revenues
§  Costs curtailed
§  Plans to improve its market share / 7.1  In the recent past, the local auto industry faced resistance in its sales as it was unable to compete with imported cars owing to government incentives on duties and taxes. This coupled with the lack of direction in the absence of an auto policy, caused local car production and sales to drop by 28% and 24% in FY13 and 1HFY14, respectively. However, things are expected to change as per proposed budget of FY15. The government is proposing to (i) withdrawn 10% FED on car sales with engines exceeding 1,800cc engine size, and (ii) increase duties and taxes by 10% on imported cars. These measures, if accepted, will positively impact the domestic auto industry, and consequently may improve tracker sales.
7.2  UTS’s revenue stream can be bifurcated into two broad categories: (i) Sales and Installation Fees (one time revenue) and (ii) Monitoring Fees (recurring revenue), for each of its product/ service offered. Monitoring Fees accounted for approximately 41% of the revenue during 1HFY14 (FY13: 63%; FY12: 39%). The volatility in revenue mix steams from dependence on business with related party (1HFY14: 69%; FY13: 67%; FY12: 74%). The management cognizant of this is diversifying its customer base by tapping corporate and individual client.
7.3  Despite the volatility in the company’s revenues, UTS has improved its gross margins (9MFY14: 42%; FY13: 39%; FY12: 36%). This is due to lower cost of tracking devices, as strengthening business profile of the company suggested better buyer power. The company kept its operating expenses under check, thus registering healthy increase in operating margin (9MFY14: 15%; FY13: 7%; FY12: 10%). This helped in posting a sizeable rise in bottom-line profitability.
7.4  At end Dec-13, UTS had 16,359 active clients, implying high dependence on tracker sales for revenue growth. Thus the company plans to increase its market share. The strategy includes (i) reinstating/retaining old customers, (ii) tapping new corporate and retail clientele, and (iii) increasing its geographical outreach. UTS is proactively working towards improvement in its service quality by establishing a customer feedback mechanism. This is likely to benefit in maintaining a high retention ratio (1HFY14: 92.7%; FY13: 94.1%). The company would introduce various new products and services that shall cater to different demographics and market segments in Pakistan. Opening of new branches/installation centers in KP and Gilgit-Baltistan region is also in pipeline. In the long-term UTS aims to evolve its value added services through systemic innovation transforming its products and services into cross-functional solutions. However, successful and timely materialization of the company’s strategy is to be seen.
8. Financial Risk
§  Increasing cash cycle
§  Low cash convergence efficiency
§  Expected debt to further leverage capital structure / 8.1  Working capital requirement grew during 9MFY14 vis-à-vis piling up of receivable (debtor days: 9MFY14: 110; FY13: 59, FY12: 39). Though the trend is positive, debtor days are expected to be lower at end Jun-14 as annual monitoring fees from various clients are expected. Nevertheless, low cash conversion efficiency (1HFY14; 20%; FY13: 8%; FY12: 15%) poses risk to financing of working capital. The company has been managing its working capital needs through a mix of internal generation, commercial liabilities and debt. As the company has growth plans in place, working capital requirement may increase further, thus putting pressure on financial profile.
8.2  Debt coverages on current cashflows are strong. However, the company is planning to obtain additional debt to finance further increase in equity investment in associated concerns. As UTS’s investments are currently non-dividend paying companies, the company would service the debt from internal generation. Thus UTS would (i) increase its client base, consequently revenues, and (ii) improve its cash conversion efficiency, to avoid increase in financial risk.
8.3  UTS has a moderately leveraged capital structure. The total debt of UTS stands at PKR 85mln at end Mar-14, a mix of finance lease and long term loan for investment in associates and working capital management. Planned borrowing is expected to leverage the capital structure further. Retention of profits is likely to increase the risk absorption capacity of the company.
Analysts / Humza Hussain
+92 42 35869504
/ Saira Rizwan
+92 42 3586 9504

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United Track System (Private) Limited (UTS) / Page 4 of 5
June 2014 / www.pacra.com