Motorcycle: ATLAS HONDA PAKISTAN LIMITED - Analysis of Financial Statements Financial Year 2002 - Financial Year 2008
Atlas Honda Limited is a joint venture between the Atlas Group and Honda Motor Co, Japan. The company was came into being due to the merger of Panjdarya Limited and Atlas Autos Ltd in 1988. Both these motorcycle manufacturing concerns were established by the Atlas Group.
In addition, a third concern, Atlas Epak Ltd. was taken over by the government of Bangladesh. Atlas Honda Limited manufactures and markets Honda motorcycles in collaboration with Honda Motor Company. The company also manufactures various hi-tech components in-house in collaboration with leading parts manufacturers like Showa Atsumitech, Nippon Denso and Toyo Denso. Honda motorcycles are the largest selling motorcycles in the country with an unmatched reputation for its high quality, reliability and after-sales service.
Atlas has undertaken to develop local manufacturing capabilities to the highest, economically feasible level. While a major role in localization has been assigned to the vendor industries, Atlas has the country's largest in-house manufacturing capability at its Karachi and Sheikhupura plants.
To support the production facilities, the company has established an R&D wing and tool making facilities through CDA and CAM, which are growing rapidly in size and function as the company expanding. Atlas has managed to execute 14 joint venture/technical assistance agreements between local vendors and foreign manufacturers for transfer of technology. Besides, Atlas has directly executed 5 joint venture/technical assistance agreements other than Honda.
AUTO INDUSTRYAfter witnessing a deceleration in motorcycle sales growth last year, the year under review witnesses a growth in motorcycle sales. This was possible due to overall competitive pricing, despite the fact that there was a consistent rise in general commodity price in the international markets, particularly the steel. This coupled with rising inflation and weakening rupee, led the cost to pass on to the consumer.
The installed capacities in almost all the sub-sectors have continued to increase, indicating a strong commitment on part of the strategic investors to the country and the long term prospects of the industry. From an installed capacity of 1.1 million units in 2005-06, the industry expanded with a capacity to 2.3 million units during 2006-07. The motorcycle sector experienced an overall growth in sales of around 30 percent over the last year.
However, the industry is being held back by certain factors. First, the unorganized sector is taking unfair price advantage as it is flouting the government's efforts to create a level playing field by avoiding taxes and government's levies. Therefore, this is posing unfair competition. Secondly, the ever-increasing cost of inputs is pushing up production costs exponentially. This may be a hindrance to the industry's aspiration to become export-oriented.
PRODUCTIONThe financial year 2008 witnessed an unprecedented increase in material prices internationally coupled with an unfavourable exchange rate and a quantum jump in the commodity prices locally. Atlas Honda, however, was able to absorb most of the cost impact by focusing on improved efficiency and process optimization.
Because of this, there was a reduction in cost, which helped to offset to an extent the external cost pressures. The factories in Sheikhpura and Karachi produced 400,000 and 50,000 units respectively. Due to this Atlas Honda sold 453,341 units this year against 332,036 units last year.
SALES PERFORMANCEAtlas Honda maintained its market leadership position in this challenging scenario. In spite of a challenging environment prevailing during this period, automotive sector, on the whole, maintained positive outlook. The installed capacities in almost all the sub-sectors have continued to increase indicating a strong commitment on part of the strategic investors to the country and the long term prospects of the industry.
From an installed capacity of 1.1 million units in 2005-06, the industry expanded with a capacity to 2.3 million units during 2006-07. The motorcycle sector experienced an overall growth in sales of around 30 percent over the last year. However, Atlas Honda was able to post a sales increase of around 38 percent.
CD-70 sales of 364,800 units led the way as Atlas Honda further strengthened its position as the market leader. A new CD-100 model was launched in September 07 and the response was encouraging. The ability of the company to maintain price stability during the major portion of the year was one paramount factor.
However, during the last quarter, the impact of rising material costs and the adverse exchange rate parity was passed on to the consumers, leading to a slowdown in the sales in the last month. This slowdown is expected to continue in the fiscal year 2009 as well. The sales this year increased by 25.6% from 332,036 units last year to 453,341 units this year. And the company's sales in terms of revenue increased from Rs 16.6 billion last year to Rs 20.8 billion this year.
PROFITABILITYThe cost of the goods increased from Rs 15 billion in the last year to Rs 19.3 billion this year showing an increase of around 28.3%. Due to this the gross profit percentage decreased marginally by 0.5% from Rs 1,563 million in 2007 to Rs 1,556 million in 2008. The gross profit margin has declined from 9.4% in 2007 to 7.5% in 2008.
PBT has remained consistent at 4.8% in FY08. So, although the gross margins have declined, the company has shored up other costs to maintain the net profit margin. Administrative expenses increased by 8.8% from Rs 209.2 million in 2007 to Rs 227.7 million in 2008. The selling and distribution expenses were controlled during the year and decreased by 28.0% from Rs 371.5 million in 2007 to Rs 267.4 million in 2008.
Other income increased from Rs 150.6 million to Rs 263.8 million as a result of increase in income, among others, from treasury operations as well as manufacturing operations. The profit after tax increased to Rs 703 million from Rs 553.5 million with an increase in net profit margin of 3.37% in 2008 compared with 3.33% in the fiscal year 2007. One important reason for this increase in profitability is the improved efficiency in serving the customer through an encompassing approach of sales, service and spare parts.
LIQUIDITYThe liquidity of the company improved this year and the current ratio increased from 1.29 in 2007 to 1.31 in the year ended 2008. The quick ratio increased from 0.70 in 2007 to 0.75 in 2008. In order to increase its current and quick ratio further, the company needs to use its resources in more efficient manner to produce more cost-effectively.
DEBT MANAGEMENTThe debt to asset ratio has decreased from 62.97% in 2007 to 60.89% in 2008. Debt to equity ratio has also decreased from 1.7 in 2007 to 1.56 in 2008. This implies an efficient debt management by the company. Also, the company has now started to retire its long-term debt.
Moreover, its financial charges have also experienced a fall. Also, the proportion of total assets kept as liabilities have also been maintained consistently throughout. Overall, the low ratios indicate proficient use of debt by the company and signal a better solvency picture.
Also, the TIE ratio has improved in 2008 indicating that it has become easier for the company to make its future payments in 2008 as compared to how it was in 2007. Also, the healthy cash position of the company in the recent times, as well as investments in deposits that provide a hedge against interest rate risk may protect the company in this regard. Overall performance of the company with respect to debt management has improved.
ASSET MANAGEMENT RATIOSAtlas Honda follows a policy of managing its assets in a consistent manner. The day sales outstanding ratio has not improved much during this period. Efficient collection of receivables will help the company provide the needed cash to retire its debt and pay interest charges. The company has also increased its portion of equity through stock dividends.
This indicates a decrease in the reliance on debt and may be better with respect to the debt management, interest payments. The operating cycle in 2008 is same as it was in 2007. This may be attributed to the better demand in the recent period that resulted in higher sales and inventory. The inventory turnover ratio is also approximately the same as that of last year.
The total asset turnover has improved slightly over the previous year indicating that assets were managed and utilized in a more productive manner in 2008. The sales to equity ratio also showed an increase and improved from 5.58 in the fiscal year 2007 to 6.13 in 2008.
Overall, Atlas Honda's performance with respect to asset management has increased in 2008 as compared to the 2007. During the year, the cash flow of the company was efficiently managed and the surplus funds were invested in high yielding mutual funds.
The inventory was also kept at an optimum level in order to create balance between the production and working capital requirements. The assets have increased mostly on account of increase in investments in securities.
The non-current assets as a percentage of total balance sheet figure, have declined from 45.7% to 39.3%. The investments in the mutual funds and other securities are likely to give in a regular yield in the fiscal year 2009, because the funds are mostly fixed security based.
MARKET VALUEAtlas Honda has been a consistent distributor of dividends every year. The board of directors has proposed a cash dividend of Rs 6.5 per share (65%) for the financial year ended June 30, 2008. Thus the dividend paid per share has increased from the previous year, as in the last year the company paid a cash dividend of Rs 6.0 per share (60%). Owing to the dividend policy and a good performance of the company this year, the market price per share has increased from 2007.
FUTURE OUTLOOKThe company believes the slow down is a temporary aberration. Given the population and the transport alternatives, a motorcycle will remain a necessity. Pakistan has grown in excess of 6 percent over the last three years. The compound annual GDP growth over the last four years is well over 6 percent.
The company expects the economy to pick up once the overall political pressures subside. With the start of the decline in oil and commodity prices, the inflation should ease off. Non-food credit growth will perforce bounce back to its annual growth rates. And Atlas Honda with its six hundred thousand motorcycles capacity will be ideally placed to ride this growth.
The focus is thus in company productivity of the manpower and machinery to help reduce non-material based cost pressures. For this the company has successfully optimized inventory and process improvements. The major tool to fight the price escalation effect is to improve efficiency in serving the customer through an all-encompassing approach of sales, service and spare parts.
The three functions are now acting in harmony to deliver quality product at the nearest point of sales to the customer, backed up with highest quality of service and availability of spare parts for all models at the most economical prices. The triangular strategy has become a model for the industry.
The company now has point of sales in even comparatively remote areas of the country. With the help of dealers, these outlets have been a successful tool for increasing coverage and meeting the competition. With over 300 dealers and a fast expanding special sales point (SSP) network of around 40, the overall effectiveness has improved. The company has now expanded the after sales network and its warranty network to over 150 dealerships.
In order to project the company's community activities safety riding activity has emerged as a full fledged function, which is imparting technical skills to motorcycle riders in the private sector as well as in the government sector by partnering with the Police and Rangers to educate users.
Spare Parts division has expanded its product line and is now supplying quality genuine parts for the quality conscious customers from all the 3 'S', 5 'S' and antenna dealerships. The 'Hub and Spoke Strategy" has proved to be a success and has helped reduce delivery time and improve number of parts supplied.
Given the current economic fundamentals of the economy marked by high domestic inflation, weakening rupee, rising interest rates, the overall politico-economic situation, the next year will be a challenging one. Historically the company has come through such critical situations successfully. Since the margins will remain under pressure, the emphasis would be on improving the manpower productivity and cost reduction, thus showing good results.
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Income Statement (Rs '000) Jun'02 Jun'03 Jun'04 Jun'05 Jun'06 Jun'07 Jun' 08
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Total Revenue 5,523,951 6,977,439 9,948,094 14,120,847 17,420,263 16,608,413 20,855,535
Cost of Goods Sold 4,788,509 5,949,644 8,713,899 12,776,676 15,790,546 15,044,640 19,298,994
General & Administrative Expenses 171,448 231,085 241,651 302,252 343,087 209,261 227,759
Selling and Distribution Expenses 150,923 128,959 119,986 143,018 185,232 371,569 267,483
Operating Profit (EBIT) 413,071 667,751 872,558 898,901 1,101,398 1,072,852 1,256,291
Financial Charges 26,572 26,430 19,309 68,050 151,611 269,337 252,091
Net Income After Taxes 270,498 427,403 544,750 630,456 676,832 553,591 703,009
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Balance Sheet (Rs '000) Jun'02 Jun'03 Jun'04 Jun'05 Jun'06 Jun'07 Jun'08
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Stores & Spares 38,065 92,867 144,582 226,540 379,380 407,730 417,564
Stock in Trade 462,254 557,280 1,285,043 1,567,530 1,937,675 1,580,925 1,862,069
Cash & Bank Balances 406,881 1,021,226 227,094 1,432,363 682,088 919,623 504,138
Total Current Assets 1,273,237 2,075,370 2,691,557 4,165,911 3,974,218 4,364,786 5,285,687
Total Non Current Assets 558,418 581,754 1,420,381 1,925,417 3,655,946 3,671,859 3,418,964
Total Assets 1,831,655 2,657,124 4,111,938 6,091,328 7,630,164 8,036,645 8,704,651
Total Current Liabilities 925,333 1,408,220 2,060,603 2,883,558 3,011,449 3,392,100 4,031,961
Total Non Current Liabilities 114,055 172,292 558,882 1,129,537 2,009,786 1,668,754 1,268,521
Total Liabilities 1,039,388 1,580,512 2,619,485 4,013,095 5,021,235 5,060,854 5,300,482
Paid Up Capital 204,368 204,368 204,368 255,460 357,644 411,291 472,985
Total Equity 792,267 1,076,612 1,492,453 2,078,233 2,608,930 2,975,821 3,404,169
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LIQUIDITY RATIO Jun'02 Jun'03 Jun'04 Jun'05 Jun'06 Jun'07 Jun'08
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Current Ratio 1.38 1.47 1.31 1.44 1.32 1.29 1.31
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ASSET MANAGEMENT Jun'02 Jun'03 Jun'04 Jun'05 Jun'06 Jun'07 Jun'08
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Inventory Turnover(Days) 33.06 34.01 52.45 46.37 48.55 43.7 43
Day Sales Outstanding (Days) 10.84 2.56 2.54 3.56 5.8 6.12 6
Operating Cycle (Days) 43.9 36.57 55 49.94 54.34 49.82 49
Total Asset turnover 3.02 2.63 2.42 2.32 2.28 2.07 2.4
Sales/Equity 6.97 6.48 6.67 6.79 6.68 5.58 6.13
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DEBT MANAGEMENT Jun'02 Jun'03 Jun'04 Jun'05 Jun'06 Jun'07 Jun'08
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Debt to Asset(%) 56.75 59.48 63.7 65.88 65.81 62.97 60.89
Debt/Equity (Times) 1.31 1.47 1.76 1.93 1.92 1.7 1.56
Times Interest Earned (Times) 16.98 27.48 47.81 14.8 7.91 3.98 4.98
Long Term Debt to Equity(%) 14.4 16 37.45 54.35 77.03 56.08 37.3
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PROFITABILITY (%) Jun'02 Jun'03 Jun'04 Jun'05 Jun'06 Jun'07 Jun'08
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Gross Profit Margin 13.31% 14.73% 12.41% 9.52% 9.36% 9.42% 7.50%
Net Profit Margin 4.90% 6.13% 5.48% 4.46% 3.89% 3.33% 3.40%
Return on Asset 14.77% 16.09% 13.25% 10.35% 8.87% 6.89% 8.08%
Return on Common Equity 34.14% 39.70% 36.50% 30.34% 25.94% 18.60% 20.70%
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PER SHARE Jun'02 Jun'03 Jun'04 Jun'05 Jun'06 Jun'07 Jun'08
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Earning per share 13.24 20.91 26.66 24.68 18.92 19.92 14.90
Price earning ratio 3.03 3.23 2.63 2.31 3.73 11.1 14.10
Dividend per share 6 7 10 10 7.5 8.5 6.50
Book value 38.77 52.68 58.42 81.35 72.95 83.21
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COURTESY: Economics and Finance Department, Institute of Business Administration, Karachi, prepared this analytical report for Business Recorder.
DISCLAIMER: No reliance should be placed on the [above information] by any one for making any financial, investment and business decision. The [above information] is general in nature and has not been prepared for any specific decision making process. [The newspaper] has not independently verified all of the [above information] and has relied on sources that have been deemed reliable in the past. Accordingly, the newspaper or any its staff or sources of information do not bear any liability or responsibility of any consequences for decisions or actions based on the [above information].
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