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 of the 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 are Japanese assemblers (Honda, Yamaha, and Suzuki). The rest are the Chinese. Both as production and sales wise, the Atlas Honda has the position of market leader.
Atlas Honda has opened the doors to 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 the Suzuki was already in the production of 100cc and 110cc motorcycles as well as the Yamaha.
Due to tough competition from the local assemblers of Chinese motorcycles that were selling at very low prices in the market, Atlas Honda introduced its 100cc 4-stroke model in the local market. Deletion programme for Honda 100cc 4-Stroke was also approved.
Atlas Honda today also has a large and growing network of 1600 motorcycles sales and services and spare part dealers. In addition, it has established technical training centres in Karachi and Lahore for a series of training courses to the mechanics and the users. Mobile training facilities have also been introduced that incorporate the latest technology, expertise and maintenance to provide the training both rural and urban areas.
INDUSTRY:
The motorcycle industry in Pakistan witnessed a compounded 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 compared to 751,667 units in 2005-06.
The 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 government's levies. Therefore, this is posing unfair competition. Second, 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.
ANALYSIS OF FINANCIAL PERFORMANCE, JUNE'02-MARCH'08:
The company witnessed a higher sales volume in this quarter compared to the same period last year. This reflected a growth of around 51%. Accordingly, the sales revenue also recorded growth. However, the gross profit declined due to higher production cost. This greater cost of production was the result of increasing raw material prices, petroleum related product prices and appreciation of foreign currencies. The decline in the profit ratios for these 9 months hence becomes evident.
However, the worth mentioning is the fact that the company managed to counter some of this cost pressure through better sales, efficient operations, and cost down measures. From the last two to three years, the company's profitability has been maintained at almost a consistent but a lower level. The internal efficiencies of the company have increased due to the pant maintenance programmes undertaken in the recent times. The selling and administrative expenses were maintained at the same level even in the face of higher sales volume.
The interest charges of the company have declined in this period supported by efficient funds management and better availability of cash. So far, the company was able to resist the cost increases but if it continues to increase, the company may have to employ more aggressive efforts to maintain or improve its profitability. The year results are predicted to be almost the same as the nine months results.
The liquidity profile of the company has shown 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 expect 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 may be said to have accounted for this slight and more gradual decline from June 2007. In addition, the surplus funds were invested in high-yielding deposits that employed effective hedging mechanism and protect the company from interest and foreign exchange risks. However, this may still require the company to use its resources in more efficient manner to produce more cost-effectively.
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 1.5 to 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. However, the TIE ratio had declined in the recent years, which may not be a healthy sign as it may indicate difficulty in the future to make its interest payments.
However, 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. It may be recommended that the company further improve its debt management policies.
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, further increasing in the period under review. This may be attributed to the better demand in the recent period that resulted in higher sales and inventory.
The accounts receivables of the company have also surged in the 9 months that indicates that the company should undertake measures to hasten its collections. This is why the Days Sales Outstanding ratio also increased in this period. Efficient collection of receivables will help the company provide the needed cash to retire its debt and pay it 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.
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 programme 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 programme 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. However, as we note in the price movement chart, the market value at the end of these 9 months has declined due to political uncertainty in the country and political turmoil in December.
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.
Pakistan has a large untapped market huge unsatisfied demand for motorcycles. This could be looked upon as a period of consolidation. 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 the 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.
The company due to its capacity enhancement programmes now has a greater ability and technical expertise to fulfil higher demand in the future. This is likely to churn out better sales and profits for the company in the future.
Due to the demographics of Pakistan, which comprise of low-income groups support the growth in motorcycle segment, while the other segments have been on a decline in the year FY07. 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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Income Statement (Rs '000) Jun'02 Jun'03 Jun'04 Jun'05 Jun'06 Jun'07 Mar'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 15,162,780
Cost of Goods Sold 4,788,509 5,949,644 8,713,899 12,776,676 15,790,546 15,044,640 13,901,934
General & Administrative Expenses 171,448 231,085 241,651 302,252 343,087 209,261 173,197
Selling and Distribution Expenses 150,923 128,959 119,986 143,018 185,232 371,569 260,580
Operating Profit (EBIT) 413,071 667,751 872,558 898,901 1,101,398 1,072,852 946,948
Financial Charges 26,572 26,430 19,309 68,050 151,611 269,337 142,802
Net Income After Taxes 270,498 427,403 544,750 630,456 676,832 553,591 562,778
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Balance Sheet (Rs '000) Jun'02 Jun'03 Jun'04 Jun'05 Jun'06 Jun'07 Mar'08
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Stores & Spares 38,065 92,867 144,582 226,540 379,380 407,730 410,149
Stock in Trade 462,254 557,280 1,285,043 1,567,530 1,937,675 1,580,925 1,818,158
Cash & Bank Balances 406,881 1,021,226 227,094 1,432,363 682,088 919,623 607,249
Total Current Assets 1,273,237 2,075,370 2,691,557 4,165,911 3,974,218 4,364,786 5,531,615
Total Non Current Assets 558,418 581,754 1,420,381 1,925,417 3,655,946 3,671,859 3,383,413
Total Assets 1,831,655 2,657,124 4,111,938 6,091,328 7,630,164 8,036,645 8,915,028
Total Current Liabilities 925,333 1,408,220 2,060,603 2,883,558 3,011,449 3,392,100 4,341,683
Total Non Current Liabilities 114,055 172,292 558,882 1,129,537 2,009,786 1,668,754 1,272,899
Total Liabilities 1,039,388 1,580,512 2,619,485 4,013,095 5,021,235 5,060,854 5,614,582
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 3,300,446
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LIQUIDITY RATIO Jun'02 Jun'03 Jun'04 Jun'05 Jun'06 Jun'07 Mar'08
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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 Mar'08
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Inventory Turnover(Days) 33.06 34.01 52.45 46.37 48.55 43.70 53.64
Day Sales Outstanding (Days) 10.84 2.56 2.54 3.56 5.80 6.12 10.13
Operating Cycle (Days) 43.90 36.57 55.00 49.94 54.34 49.82 63.77
Total Asset turnover 3.02 2.63 2.42 2.32 2.28 2.07 1.70
Sales/Equity 6.97 6.48 6.67 6.79 6.68 5.58 4.59
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DEBT MANAGEMENT Jun'02 Jun'03 Jun'04 Jun'05 Jun'06 Jun'07 Mar'08
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Debt to Asset(%) 56.75 59.48 63.70 65.88 65.81 62.97 62.98
Debt/Equity (Times) 1.31 1.47 1.76 1.93 1.92 1.70 1.70
Times Interest Earned (Times) 16.98 27.48 47.81 14.80 7.91 3.98 6.63
Long Term Debt to Equity(%) 14.40 16.00 37.45 54.35 77.03 56.08 38.57
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PROFITABILITY (%) Jun'02 Jun'03 Jun'04 Jun'05 Jun'06 Jun'07 Mar'08
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Gross Profit Margin 13.31% 14.73% 12.41% 9.52% 9.36% 9.42% 8.32%
Net Profit Margin 4.90% 6.13% 5.48% 4.46% 3.89% 3.33% 3.71%
Return on Asset 14.77% 16.09% 13.25% 10.35% 8.87% 6.89% 6.31%
Return on Common Equity 34.14% 39.70% 36.50% 30.34% 25.94% 18.60% 17.05%
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PER SHARE Jun'02 Jun'03 Jun'04 Jun'05 Jun'06 Jun'07 Mar'08
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Earning per share 13.24 20.91 26.66 24.68 18.92 19.92 11.90
Price earning ratio 3.03 3.23 2.63 2.31 3.73 11.10 16.47
Dividend per share 6.00 7.00 10.00 10.00 7.50 8.50 6.00
Book value 38.77 52.68 58.42 81.35 72.95 83.21 80.25
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