Atlas Honda Limited (PSX: ATLH) is a market leader in the two-wheeler industry catering to about 60 percent of all motorcycle sales manufactured in Pakistan. The company's history dates back the 1960s when the Atlas Group was founded with the incorporation of an investment company called Shirazi investments with an initial capital of Rs 500,000. A technical collaboration agreement was signed with Honda Motors Company Limited (HMC) later that year for the production and sales of motorcycles in Pakistan and as a result, Atlas Autos Limited was formed with manufacturing facilities located in Karachi. In 1979, another motorcycle manufacturing plant at Sheikhupura was established by the name Panjdarya Limited. A joint venture agreement was entered into in 1988 with HMC. Both Atlas Autos Limited and Panjdarya Limited operated separately until the two were merged in 1991 and Atlas Honda Limited began operations officially.
Atlas Honda has expanded, introducing new lines and models of motorcycles. Its latest milestone has been to produce 920,000 units in one year. The company has been debt free for the past six years incurring no borrowing costs. Other than motorcycles, the company also produces various value-added auto parts for in-house consumption also catering to the after-sale market. The company also exports motorcycles to Sri Lanka, Afghanistan and Bangladesh, currently, exporting between 4,000 and 5,000 motorcycles a year. It also has an established wide network of over 1,600 sales services and spare parts dealers.
Investments, and shareholders
More than 52 percent of the company's shares are held by Shirazi Investment limited as at March 2017, while the other major partner is Honda Motor Company that held 35 percent of the shares at the close of the company's last financial year.
The company has investments in Atlas Hitec Private Limited (AHPL), which was incorporated in 2012 and is in the business of manufacturing automobile and allied products. Atlas Honda holds 29.23 percent of AHPL's shares.
Currently, the company is in the process of going through a series of expansions at its existing plants and intends to go up to 1.35 million units annually in the next year or so. The investment is for $100 million using own capital of $50 million while $30 million and $20 million are to be invested by associated companies and parts suppliers, respectively. The upgraded plant has the capacity to produce 3000 units of motorcycles per day.
Financial and operational performance
The company has invested in improving the cost efficiency of its production and supply chain by installing a renewable solar power source of energy, installing waste heat recovery and increasing localization at different levels of production.
Sales have grown massively on the back of a strong demand for cheap transportation in fast urbanizing cities and towns. The unrelenting surge in local and imported motorbikes on the whole is an indicator of where demand is headed in the future. According to numbers retrieved from Pakistan Automotive Manufacturers Association (PAMA), the company was selling over 60,000 motorcycles in the 2000s, which doubled in only a few years and increased by 13 times in the past two decades. The company nearly crossed the 1 million motorbikes per year mark and hopes to reach 1.35 million soon given its expansion. It is also introducing newer models to cater to different segments.
In the entry segment (70cc), the company faces strong competition from local and imported suppliers but has done well through two of its brands in the category. In the year ending March 2017, the company's sales in the segment grew by 16 percent. Meanwhile, the fuel efficient 100cc segment witnessed a growth of 12 percent. Strong urban demand pushed sales for the higher engine vehicle, in the 125cc category.
The value-added auto parts segments were promoted through service workshops and a focus on marketing activities tailored to promote genuine parts and engine oil in order to maintain the longevity of motorcycles. Together these sales helped the company to grow revenue by 17 percent in 2017 with earnings growth of 25 percent year-on-year.
The company also improved its margins from 9 percent in 2014 to 11 percent in the outgoing financial year by employing cost-cutting measures, and achieving greater level of localization. Growing to scale will also help the company to improve margins in the long term. However, one threat that exists going forward is the unfavourable fluctuations in currency as the company has some imported content as its raw material. The company manages its cash well and has been internally financing the expansion with no borrowing costs to its balance sheet, which is a feat.
The future of motorbike industry and Honda
The demographic shifts into the economy with youth population on the rise has given an impetus to demand for motorcycles; specially in absence of cheaper and more convenient mass transit. They are common not just in cities, but even in rural or underdeveloped roads and terrains as they are easier to manage. Moreover, lower fuel prices and affordable financing has also propelled demand. New car apps like careem and uber; and new ride sharing apps are introducing motorcycles as a viable mode of transportation for city dwellers.
This demand bodes well for Honda being an established leader in different segments of motorcycle and its upcoming expansion fits well with demand dynamics. However, the company faces tough competition from cheap imported motorcycles as well as low quality parts that are often smuggled into the country and have formed an informal economy of its own. This competition does hamper existing motorcycle manufacturers to capture a greater share of the market and tougher regulations are needed to curb this influx. The company has managed to keep prices unchanged, which may give cheaper Chinese counterparts as well as those imported a run for their money but the existence of the informal economy will remain troublesome.
There is also a black market of motorcycles where authorized dealers are holding onto stock and demanding a premium to sell them to consumers. This is further adding to the distortion in the sector as demand goes up and needs to be addressed by regulators.
Honda for its part has done a good job of maintaining its market share, and its continuous investment back into the business puts it at a domineering space to capture a good chunk of the demand that is being created in the motorcycle and bike sectors.
===========================================================
Atlas Honda Limited Half year Half year
Rs (mn) ended ended YoY
Sep 2017 Sep 2016
===========================================================
Sales 36,917.39 29,668.35 24%
Cost of Sales 32,850.55 26,540.11 24%
Gross Profit 4,066.84 3,128.24 30%
Sales and marketing 891.26 754.75 18%
Administrative 320.58 275.42 16%
Other operating expenses 237.13 188.91 26%
Other income 405.17 394.77 3%
Finance cost 11.06 14.38 -23%
Profit before tax 3,041.97 2,316.74 31%
Taxation 800.12 605.98 32%
Net profit for the period 2,241.85 1,710.76 31%
Earnings per share (Rs) 21.68 16.54 31%
Sales (units) 517,019 419,276 23%
GP margin 11.0% 10.5% 4%
NP margin 6% 6% 5%
===========================================================
Source: PSX notice/PAMA
=======================================================================
Pattern of Shareholdings of Ordinary Shares %
Shares (year ending as at March 2017)
=======================================================================
Honda Motor Company Limited 36,192,395.0 35.0
Shirazi Investment (Pvt.) Limited 54,220,693.0 52.4
General Public 9,296,230.0 8.99
=======================================================================
Source: Company Accounts
Comments
Comments are closed.