Atlas Honda Pakistan Limited is a joint venture between the Atlas Group and Honda Motor Company, Japan. In Pakistan, motorcycle assembly started in 1964 when the local Atlas Group started assembling Honda motorcycles in Karachi.
The company manufactures and markets Honda motorcycles in collaboration with the Honda Motor Company. Presently, there are 43 motorcycle assemblers in Pakistan. Three of them Japanese assemblers (Honda, Yamaha, and Suzuki) and the rest are Chinese. Both production and sales wise, Honda motorcycles possessed the market leader position.
Atlas Honda opened the doors for advanced Japanese cars in the country along with pioneering several technologies such as Oriel, Prosmatec Transmission (Progressive Shift Management Technology), Anti-locking Breaking System brakes and others.
Initially, under the cartel agreement with the Japanese, Atlas Honda was manufacturing only three variants of 50cc, 70cc and 125cc while Suzuki was already in the production of 100cc and 110 cc motorcycles and so was Yamaha. Due to tough competition from the local assemblers of Chinese motorcycles that were selling at very low prices, Atlas Honda introduced 100cc 4-stroke model of motorcycle in the local market. Deletion programme for Honda 100cc 4-stroke was also approved.
Currently, the Atlas Honda has a large and growing network of 1600 motorcycles sales, services and spare part dealers. Further, the company had established the technical training centres in Karachi and Lahore to provide a series of training courses to the mechanics and motorcycle users. Mobile training facilities have also been introduced that incorporate the latest technology, expertise and maintenance to provide training to both rural and urban areas.
INDUSTRY: The motorcycle industry in Pakistan has shown a compound growth of 30% for the past five years, reaching a production level of around 750,000 units on average. The production of motorcycles registered a growth of 11.65 percent with an overall production of 839,224 units in 2006-07 as compared to 751,667 units in 2005-06. 2008 maybe expected to surpass the 800,000 level. However, the industry is being held back by certain factors. First, the unorganised sector is taking unfair price advantage as it is flouting the government's efforts to create a level playing field by avoiding taxes and levies. Therefore, this is posing unfair competition. Secondly, the ever-increasing cost of inputs is pushing up the production costs exponentially. This may be a hindrance to the industry's aspiration to become export-oriented.
RECENT RESULTS 1H'08: During the first half, the company revenue increased 19.15% to Rs 9.25 billion as compared to Rs 7.99 billion in the same period last year. In line with increase in sales, the selling and administrative expenses increased to Rs 293.20 million as compared to 274.60 million of same period last year. The profit before tax increased to Rs 532.12 million from Rs 350.34 million while profit after tax increased to Rs 381.05 million as compared to 221.82 million in the same time year as last year.
ANALYSIS OF FINANCIAL PERFORMANCE: The company experienced higher sales volume of 207,588 units in the half year July-Dec'07 due to the price reduction effect. The company reduced the prices of its motorcycles to make them more reasonable for the customers. The enhanced sales volume more than compensated the price reduction. In line with the increase in sales, the selling and administrative expenses increased too. The financial charges of the company declined due to a favourable cash position and efficient fund management. The taxation of the company witnessed a decline this period although the incidence of high taxation is an issue facing the motorcycle industry at large.
A locally manufactured motorcycle of Rs 35,000-50,000 is charged Rs 17,000 of taxation. Moreover, with the entry of Non-PAMA (Pakistan Automotives Manufacturers Association) Original Equipment Manufacturers (OEMs) - most of them being low cost Chinese assemblers - a competitive price difference has emerged of about 25% (compared to Rs 52,000 vs. Rs 68,000 for the Honda 70cc in 1999) that is posing tough competition for brands such as Atlas Honda, Yamaha and other PAMA members. In addition, the continuous price reductions (2006 price for average Non-PAMA OEM 70cc clone is Rs 40,000 vs. Rs 54,000 for Honda 70cc) have also negatively affected the PAMA members, particularly the Atlas Honda.
Atlas Honda, despite the above, succeeded in its efforts by reaching a sales level of 207,588 units that is more than half the achieved production target of 331,621 units for the previous year. Some major operational changes have been made and plants at Karachi and Sheikhupura were consolidated. We may expect greater efficiency in production in the coming years and an achievement of a production level more than 330,000 units.
The liquidity profile of the company witnessed a falling trend. Though the company is shunning off its dependence on borrowings, its trade and other payables have been increasing. Due to increased cost of raw materials, we may suspect that the payables to suppliers have increased. The cash balances of the company have shown signs of increasing. The increase in sales and a healthy funds management are accountable for this.
Also, the surplus funds were invested in high-yielding deposits that employed effective hedging mechanism. However, this may still require the company to use its resources in more efficient manner to produce more cost-effectively. The price reduction may bring about a further surge in demand, increasing revenues as it has also done so.
To ease its liquidity conditions, the company has invested its earnings in mutual funds. Most of debt ratios have been low. The ratio of debt to equity has been maintained at around two. This implies an efficient debt management by the company. 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.
Atlas Honda follows a policy of managing its assets in a consistent manner. This is clearly visible by observing the operating cycle of the firm. However, the operating cycle has slightly increased since 2002 and 2003, decreasing again in the period under review. This may be attributed to the better demand in the recent period that resulted in higher sales and hence higher profits.
Atlas Honda has been a consistent distributor of dividends every year. The dividend per share of the company has decreased presently to finance the expansion and capacity build-up of the plants. Atlas Honda has recently undertaken a program of consolidation of its plants to improve their production efficiency. This is likely to alleviate the inventory build-up and generate further sales. As the company continues to pursue this program for another few years, we may expect the dividend per share to be the same for the coming year or slightly decrease. This may only be temporary.
The market price per share of the company has declined since 2005, again owing to lower demand and the need to position a little more competitively to ward off contention from the lower priced brands. In 2006-2007, the market price was higher in the beginning of the fiscal year but declined then onwards. Towards the end of 2007, the market value has increased.
FUTURE OUTLOOK: Global motorcycle production increased from 30 million units in 2004-2005 to 40 million units in 2005-2006 with China alone producing 17 million units. Pakistan came at number seven with a production of 751,000 motorcycles or about 2% of the global total. It is estimated that the production in Pakistan will cross the million units mark by 2008.
In order to compete with Japan, China and India in the regional export markets, the local motorcycle manufacturers have sought 15 percent export subsidy on Freight on Board (FOB) price of the motorcycles. The industry has further recommended that customs duty on Completely Build Unit (CBU) be reduced from 90% to 70% in next four years with 5 percent annual reduction. The industry has suggested that customs duty on the import of completely knockdown (CKD) motorcycles be reduced from the current 30 percent to 10 percent in the next four-year period.
It recommended application of rate of duty on import of components and parts liable to lower rate of duty for CKD condition motorcycles' imports also. It sought reduction in customs duty on import of other inputs presently in the range of 15 percent to 35 percent to 10 percent in the next four years.
The local manufacturers feel that these incentives would make the local motorcycle industry more competitive locally as well as in the regional export markets, resulting in an increase in the exports.
With the price reduction, its effect is likely to roll on further in the future. The demand for motorcycles has increased. This is likely to churn out greater revenues and profits for the firm in the future and hence, more healthy cash position.
Due to the demographics of Pakistan, which comprise of low income group support the growth in motorcycle segment, while the other segments have been on a decline in the year FY'07. Amongst the different segments of the automotive sector, motorcycles seem to be the only segment, which is set to achieve the AIDP agenda set by the EDB (Engineering Development Board).
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Auto Data
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HY'08 HY'07 Chg.(%) HY'08 HY'07 Chg.(%)
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Production Sales
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Cars 84,172 84,261 -0.1% 78,759 82,287 -4.3%
Tractors 24,857 25,054 -0.8% 24,930 24,660 1.1%
Trucks 1,836 2,327 -21.1% 2,006 2,201 -8.9%
Bus 532 462 15.2% 555 455 22.0%
LCV's 10,119 10,557 -4.1% 9,674 10,045 -3.7%
Motorcycle 297,719 225,285 32.2% 299,063 226,031 32.3%
Total 419,235 347,946 20.5% 414,987 345,679 20.0%
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ATLAS HONDA COMPANY LIMITED-KEY FINANCIAL DATA
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Income Statement (Rs '000) Jun'02 Jun'03 Jun'04 Jun'05 Jun'06 Jun'07 Jun-Dec'07
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Total Revenue 5,523,951 6,977,439 9,948,094 14,120,847 17,420,263 16,608,413 9,520,607
Cost of Goods Sold 4,788,509 5,949,644 8,713,899 12,776,676 15,790,546 15,044,640 8,689,895
General & Administrative Expenses 171,448 231,085 241,651 302,252 343,087 209,261 115,327
Selling and Distribution Expenses 150,923 128,959 119,986 143,018 185,232 371,569 177,875
Operating Profit (EBIT) 413,071 667,751 872,558 898,901 1,101,398 1,072,852 623,586
Financial Charges 26,572 26,430 19,309 68,050 151,611 269,337 91,463
Net Income After Taxes 270,498 427,403 544,750 630,456 676,832 553,591 381,048
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Balance Sheet (Rs'000) Jun'02 Jun'03 Jun'04 Jun'05 Jun'06 Jun'07 Jun-Dec'07
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Stores & Spares 38,065 92,867 144,582 226,540 379,380 407,730 399,907
Stock in Trade 462,254 557,280 1,285,043 1,567,530 1,937,675 1,580,925 1,701,215
Cash & Bank Balances 406,881 1,021,226 227,094 1,432,363 682,088 919,623 518,649
Total Current Assets 1,273,237 2,075,370 2,691,557 4,165,911 3,974,218 4,364,786 5,084,134
Total Non Current Assets 558,418 581,754 1,420,381 1,925,417 3,655,946 3,671,859 3,480,854
Total Assets 1,831,655 2,657,124 4,111,938 6,091,328 7,630,164 8,036,645 8,564,988
Total Current Liabilities 925,333 1,408,220 2,060,603 2,883,558 3,011,449 3,392,100 3,995,369
Total Non Current Liabilities 114,055 172,292 558,882 1,129,537 2,009,786 1,668,754 1,448,986
Total Liabilities 1,039,388 1,580,512 2,619,485 4,013,095 5,021,235 5,060,854 5,444,355
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 3,120,633
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LIQUIDITY RATIO Jun'02 Jun'03 Jun'04 Jun'05 Jun'06 Jun'07 Jun-Dec'07
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Current Ratio 1.38 1.47 1.31 1.44 1.32 1.29 1.27
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ASSET MANAGEMENT Jun'02 Jun'03 Jun'04 Jun'05 Jun'06 Jun'07 Jun-Dec'07
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Inventory Turnover(Days) 33.06 34.01 52.45 46.37 48.55 43.70 80.55
Day Sales Outstanding (Days) 10.84 2.56 2.54 3.56 5.80 6.12 13.64
Operating Cycle (Days) 43.90 36.57 55.00 49.94 54.34 49.82 94.19
Total Asset turnover 3.02 2.63 2.42 2.32 2.28 2.07 1.11
Sales/Equity 6.97 6.48 6.67 6.79 6.68 5.58 3.05
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DEBT MANAGEMENT Jun'02 Jun'03 Jun'04 Jun'05 Jun'06 Jun'07 Jun-Dec'07
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Debt to Asset(%) 56.75 59.48 63.70 65.88 65.81 62.97 63.57
Debt/Equity (Times) 1.31 1.47 1.76 1.93 1.92 1.70 1.74
Times Interest Earned (Times) 16.98 27.48 47.81 14.80 7.91 3.98 6.82
Long Term Debt to Equity(%) 14.40 16.00 37.45 54.35 77.03 56.08 46.43
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PROFITABILITY (%) Jun'02 Jun'03 Jun'04 Jun'05 Jun'06 Jun'07 Jun-Dec'07
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Gross Profit Margin 13.31% 14.73% 12.41% 9.52% 9.36% 9.42% 8.73%
Net Profit Margin 4.90% 6.13% 5.48% 4.46% 3.89% 3.33% 4.00%
Return on Asset 14.77% 16.09% 13.25% 10.35% 8.87% 6.89% 4.45%
Return on Common Equity 34.14% 39.70% 36.50% 30.34% 25.94% 18.60% 12.21%
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PER SHARE Jun'02 Jun'03 Jun'04 Jun'05 Jun'06 Jun'07 Jun-Dec'07
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Earning per share 13.24 20.91 26.66 24.68 18.92 19.92 13.46
Price earning ratio 3.03 3.23 2.63 2.31 3.73 11.10 11.74
Dividend per share 6.00 7.00 10.00 10.00 7.50 8.50 7.50
Book value 38.77 52.68 58.42 81.35 72.95 83.21 75.87
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