Atlas Honda Limited

Atlas Honda Limited (PSX: ATLH) is a top motorcycle manufacturer in the country leading the two-wheeler marker with over 60 percent market share. The company has immense brand recognition and being a Japanese player has carved a unique space in the market that no new players have been able to penetrate. Atlas Honda has expanded as demand for two-wheelers took a turn upward and introduced different two-wheeler variants. The company supplies across the country and also exports to Afghanistan and Bangladesh and has the current total capacity to manufacturing 1.25 million motorcycles after an expansion, and intends on increasing it to 1.35 million units per annum.
As per its annual report for Mar-18, the company is debt-free for the past seven years incurring no borrowing costs. Honda has an established countrywide network of over 1,600 sales centers and spare-parts dealers.
Group activates and shareholdings
Atlas Honda is part of the Atlas Group whose foundations were laid in the 1960s when Shirazi Investments (Pvt.) Limited was incorporated with an initial capital of Rs 500,000. In 1963, with funds generated by Shirazi investments, a technical collaboration agreement was signed with Honda Motors Company Limited, Japan (HMC) for manufacturing motorcycles in Pakistan. Atlas Autos Limited was formed with manufacturing facilities located in Karachi. In 1979, the group set up another motorcycle manufacturing plant located in Sheikhupura, Punjab called Panjdarya Limited. Honda Motor Japan entered into a joint-venture agreement in 1988 with both Atlas Autos Limited and Panjdarya Limited which operated independently of each other. The two were merged in 1991 to form Atlas Honda Limited.
The Atlas group is highly diversified with investments in engineering, power generation, and financial services. Of the eighteen trading entities operating under the group's banner, four are listed on the stock exchange.
Atlas Honda's shareholdings are pretty concentrated. More than 52 percent of the company's shares are held by Shirazi Investment limited as on Mar-18, while the Japanese partner Honda Motor Company held 35 percent of the shares which makes 90 percent of the total company's shares. Only 9 percent of the shares are held by individuals. Meanwhile, Atlas Honda itself has investments in Atlas Hitec Private Limited (AHPL), which was incorporated in 2012 to manufacture automotive parts and allied products. Atlas Honda holds 29.23 percent of AHPL's shares.
Financial and operational performance
Atlas Honda's production has grown year after year as demand for two-wheelers has taken up, not only in the urban centers but also in the rural areas across the country. Demand has grown as transport options have dwindled and motorcycles have become more affordable with easy installment plans available for the average consumer. The demographic changes has also influenced the rise in demand-more youth population entering the workforce may be a huge driver for 2-wheeler demand and with Honda's reputation, volumes have ballooned for the company. The company has invested back in the form of raising capacity to continue being a market leader.
Revenues have more than doubled between 2011 and 2018, though due to high competition with imported as well as local players, prices have been kept steady, unlike in the price trends in the passenger car segment. A few Chinese players have entered the space in the past years including Road Prince and United Auto Motorcycles but Atlas Honda has managed to retain its market share due to its strong brand loyalty.
In the lowest motorcycle segment, the 70cc, competition has most intense but it remains Honda's highest selling variant. In 2018, sales grew by 17 percent, against 16 percent the previous year. The fuel efficient 100cc motorcycle sales grew by 10 percent in 2018 against 12 percent the previous year. Meanwhile, the higher end engines, primarily 125cc, have garnered more attention from urban centers with demand improving over the past years, and the shift from low to high engine motorcycles is also visible. The segment for Honda grew by 18 percent in 2018. The company launched promotion campaigns such as 'econo run competitions', and 'free checkup camps' to deepen market penetration in this category.
In 2018, the company also introduced CB 150F, its first in the 150cc category. The company has several financial plans with different banks that have allowed affordability for different income segments looking to procure a motorcycle. After sales and parts market is also widespread The Company has a spare parts segment that has grown as motorcycle sales have grown.
Despite a growing production facility, and rising revenues, the company's margins have only just hit double-digits. In 2011-13, they were 7 percent- 9 percent and grew to 10-11 percent in the period 2012-18. Low margins are because prices have been kept consistently at the same levels due to heavy competition. Though the company is highly localized (up to 90%) it is sensitive to the rupee-dollar parity as well as commodity prices (such as steel) in the international market since many inputs are imported by either Honda or its parts makers. Higher costs have ensured margins stagnancy and promise fluctuations when the rupee depreciates or commodity prices move upward.
On the debt front, the company only incurs bank charges on transaction cost paid to banks for collection from customers which remain nominal. The company manages its cash well and has been internally financing the expansion with some investment component but no debt.
Honda's outlook
In the nine-month period ending Dec-18, the company is slowly feeling the heat of a cooling down economy, and will likely post similar results for the year ending Mar-19 soon. Volumetric sales grew by 7.8 percent which resulted in a revenue growth of 7 percent in the nine-month period, though in the third quarter, the company saw its revenues decline by 1 percent. Margins returned back to single digit by falling from 10 percent to 8 percent due to higher costs. High costs have come on not only due to the rupee depreciation but also higher commodity prices. Costs will remain a concern for the entire automotive industry that depends on imported content. Earnings dropped by 26 percent despite incurring virtually no finance costs and keeping overhead costs low at 4 percent and maintaining that level.
The tough times however are just arriving now, despite the leasing options for motorcycle owners at zero mark-up. Buying powers will reduce as headline inflation goes up. Honda has also raised prices recently along with other players as they are unable to absorb the significantly higher costs. Meanwhile, competition between players will persist and smuggled motorcycles will also affect their sales more so now than before as local motorcycles become expensive. The overall motorcycle market size is expected to come down.

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Pattern of Shareholding (as on March 2018)

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Categories of Shareholders                          Share

Associated Companies, Undertakings and Related Pa   90.3%

Atlas Insurance Limited                              2.8%

Honda Motor Company Limited                         35.0%

Shirazi Investments (Pvt) Limited                   52.4%

NIT and ICP                                         0.03%

Banks, Development Finance Institutions,

Non-Banking Finance Institutions, Insurance

Companies, Modaraba and Mutual Funds.               0.55%

Individuals                                         9.00%

Others                                              0.15%

Total                                                100%

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Source: Company accounts

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Atlas Honda Limited (ATLH)- 9M ending Dec-18

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                                        9M         9M

Rs (mn) Apr18-Dec18            Apr17-Dec17        Chg

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Sales                               60,538     56,512     7.1%

Cost of Sales                     (55,545)   (50,329)    10.4%

Gross Profit                         4,993      6,182   -19.2%

Selling & Marketing expenses       (1,396)    (1,346)     3.7%

Administrative expenses              (463)      (479)    -3.5%

Other operating expenses             (263)      (354)   -25.7%

Other income                           687        605    13.6%

Profit from operations               3,572      4,653   -23.2%

Finance cost                          (14)       (14)     0.9%

Profit from associate                   13         45   -70.5%

Profit before tax                    3,558      4,639   -23.3%

Taxation                           (1,044)    (1,226)   -14.9%

Net profit for the period            2,514      3,412   -26.3%

Motorcycles (units)                855,845    793,728     7.8%

Earnings per share (Rs)              24.31      33.00   -26.3%

GP margin                             8.2%      10.9%   -24.6%

Operating margin                      5.9%       8.2%   -28.3%

NP margin                             4.2%       6.0%   -31.2%

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