Incorporated in 1992, Honda Atlas Cars Pakistan Limited is a joint venture between Honda Motor Company Limited Japan, and the Atlas Group of Companies, Pakistan. The company is listed on all the three stock exchanges. The first car rolled off the assembly line on May 26, 1994. To date, more than 80,000 cars have been produced and sold by the company.
The auto industry is going through a phase of consolidation. After registering an average growth rate of 40 percent from 2003 to 2006, the industry growth decelerated to 9 percent in 2007 and a marginal growth of 2.8 percent in 2008. The liberal policy to import reconditioned cars affected the growth rate. However, the terms of imports since tightened last year.
As per the latest data released by the Pakistan Automotive Manufacturers Association (PAMA), after witnessing a growth pattern since FY02 with 6 years CAGR of 28% to 171,786 units in FY07 from 39,047 units in FY01, the car sales declined by 4.2% in FY08 and stood at 164.65k units as against 171.79k units in FY07. The low priced category of cars was the beneficiary of this shift in customer preference.
The cars with an engine capacity of 801cc to 1299cc registered a lesser decline compared to last year. The auto sector in general, has witnessed a slowdown owing to the fact that two to three times, the auto assemblers increased the car prices in the last year in order to support their declining gross margins. Auto assemblers have linked the price-hike to the rising prices of steel components and appreciation of the yen against the rupee, which pushed up the production cost.
Further, car financing became more expensive due to increase of 200bps in discount rate in FY08. As a result, there was a slowdown in car financing amid rising mark-up rates and tight documentation due to significant rise in NPLs of the banks. The rising trend of fuel prices also forced the potential buyers to look for economical options.
Among different engine capacity cars, sales volume of low engine capacity ie 800cc declined nominally 0.6% in FY08 over FY07. However, sales volume of high engine capacity cars ie 1000cc and above 1300cc declined 11.6% and 15.6% to 48,887 units and 50,824 units in FY08 from 55,295 units and 60,190 units respectively in FY07.
The year ending March-07 was not a good year for the company. Not only the sales had dropped by 34%, resulting in a massive loss of market share, but also the distribution and marketing expenses have gone up by 43.3%, cumulatively resulting in posting an operating loss in FY07. Interest payments of short-term and long-term debts taken for capacity expansion also showed their weight on the income statement, thus pushing the company more into the red. FY06 had been very good; with the company posting an EPS of Rs 16.80, whereas FY07 sees the EPS dropping to Rs -3.17.
Honda Car faces a few inherent weaknesses that threaten it at a time when its competitors are thriving. One of the lowest deletion levels - causing Honda to be susceptible to currency fluctuations and any change in custom duties, factory situated away from the port - higher transportation charges specially in the wake of high oil prices, no presence in the lower end car market, intense competition from imported cars in high-end market are the factors that have contributed to decrease in sales and increase in costs.
Also, a massive capacity expansion, increasing its capacity to 50,000 units per annum, which the company has undertaken in FY07, exposed the company to higher depreciation and financial charges which led to a decline in the gross profits despite HCAR rationalizing production in view of lower sales.
HCAR boasts a presence in the 1300-1600cc cars category. It also deals in imported Honda Accord (2400 cc). HCAR faces competition not only from the local assemblers but also from a variety of imported cars that offer more value at a lesser price.
FINANCIAL HIGHLIGHTS 2008 HCAR produced 15,080 units during the year 2008 as against 18,240 units in 2007. This shortfall was mainly due to an overall decline in production of 1300cc and above. The company took certain initiatives to improve sales volume, however it closed at 15,604 units for the year against 18,709 units in the last year. The company sales were Rs 14,715 million during 2008 against Rs 17,055 million achieved last year and as discussed below, Honda Cars also bore the brunt of rising prices, depreciation of the rupee against the dollar and tight monetary policy stance by the SBP.
The cost of goods sold was Rs 14,088 million against Rs 16,882 million in the last year. The gross profit has improved to Rs 627.5 million compared to a gross profit of Rs 172.9 million in the last year. The gross profit margin has improved substantially to 4.3 percent of sales against 1.0 percent of sales for last year. The last couple of months have seen the rupee under extreme pressure against the major currencies of the world.
The rupee depreciated by 23.8% and 3.4% respectively against both the currencies over the period. This sharp increase in exchange rates has adversely affected the cost of production and thus the top line of the company in FY08.
Honda's liquidity ratio has been consistently below the industry average. FY07 shows the CR to be <1. Quick ratio is also quite low, signifying a serious liquidity crunch for the company. It is only in FY08 that the company has recovered from the liquidity crunch by paying off its long term debt.
After posting good results in FY06, HCAR has shown dismal results in FY07. All the profitability figures take a nosedive, however it is to be understood that foreign competition notwithstanding, other reasons like increased depreciation and financing charges are temporary. In FY08, the sales figures showed a substantial decline and the cars sales volume plunged 22.7% to 14,201 units from 18,361 units in the same period last year, mainly due to dull response from the customers toward new model of Honda Civic and the overall slowdown in the auto sector owing to the reasons as discussed before. In 2007, ROA has gone down because of the dual reason of decreasing returns and increase in asset size because of capacity expansion and introduction of new models.
On the other hand ROE and ROA recovered from its negative position in FY08 as a result of a marginal increase in net margin. Gross profit margin has declined after posting a healthy figure in FY06. There was a rise in gross profit margin though marginal due to the fact that cost of production surged in consequent of rising prices of fuel (effecting transportation cost) and imported components.
It is only in FY06 that the company has acquired significant long-term debt financing. In FY07, the long-term debt to equity ratio was above the industry average, while historically the D/E and debt to asset ratio has remained below the industry averages. Generally the TIE has remained above the industry average, but after 2005 it has hovered below the averages.
The financial charges have increased 60 times since 2005, thus hitting the ratios. Increased leverage also makes the company more susceptible to any changes in the top line, appreciation in yen, increase in custom duties and increased steel prices. During the year 2008, the company was able to pay off all its short term running finances. A significant portion of long term loans was also settled. It paid all but Rs 500 million of its loans through right issue and through internal generation of funds.
Financial and other charges also reduced by Rs 131.4 million ie from Rs 370.0 million last year to Rs 238.6 million for the same reason as mentioned before. At present, approximately 53% of the total assets are being financed by debt, which shows a high level of debt reliance for financing.
After having caught up with the industry averages in FY06, HCAR's EPS dipped drastically in FY07. In FY08, the EPS increased marginally as explained by the profitability ratios and the reasons discussed before. A decline in the top-line coupled with a decline in other incomes gained through its investments in the capital market securities led to the bottom-line being in the red. The market price also follows the same trend as the financial results. Dividend per share historically slightly below the industry averages, although the payout ratio has remained in line with the averages till FY06. The book value of the company has shown an ever-declining trend as the company kept on increasing its shareholder base.
Inventory turnover (days) is lower than the industry average. So is the operating cycle, but it is higher than the two main competitors of HCAR. Sales/equity and total asset turnover has been performing better than the industry averages historically. However, it is to be understood that other than the decline in sales, the factor that has hit HCAR the most is an unprecedented rise in depreciation and financial charges, by 223% and 563% respectively. HCAR, seen purely in comparison to the two leading automobile assemblers, lacks quite a bit, but in comparison to the industry it performs well on some accounts and badly on others. In FY08, sales/equity declined as the sales volume declined with expansion in the shareholder base.
Furthermore, inventory turnover also decline owing to a decline in sales and not to the fact that the company has been more efficient in converting its inventory into cash. No accounts receivables have been posted by the company so far.
POST BUDGET ANALYSIS 2008 Federal excise duty of 5% has been imposed on import as well as locally manufactured cars with an engine capacity of above 850cc which will increase product price, further dampening the already dwindling auto demand. Further, the duty rate on import of cars/jeeps above 1800cc has been increased to 100% from 90% earlier which will surely hamper the company's profitability with respect to trading income in near future because most of the cars in HCAR's portfolio are above 1800cc.
Moreover, fixed import duty on old and used cars and jeeps has been increased by 10%.This would protect the local industry through expected increase in the cost of used imported vehicles, thus providing cost advantage to local assemblers. A withholding tax (WHT) of 2.5% on purchase of locally manufactured motor car or jeep is proposed to be collected by a motor vehicle registration authority at fixed rates depending on the engine capacity which will increase the car prices, which are already on the high side. Finally, the rate of General Sales Tax (GST) on car purchase has been proposed to increase from 15% to 16%.
FUTURE OUTLOOK Going forward, we expect that declining trend of cars sales would likely to continue also in the current fiscal year due to the said reasons. Recently announced Budget 2008-09 is also negative for the auto sector. Rising steel prices, shrinking auto financing, depreciating Pak rupee against the yen and Euro coupled with expected decline in cars sales would likely to have a negative impact on the bottom line of the auto assemblers in FY09.
==================================================================================================
HONDA ATLAS-FINANCIALS
==================================================================================================
Income Statement (Rs '000) FY'04 FY'05 FY'06 FY'07 FY'08
--------------------------------------------------------------------------------------------------
Total Revenue 9,358,369 16,587,217 25,638,698 17,055,115 14,715,495
Cost of Goods Sold 8,602,391 16,304,182 24,471,184 16,955,181 14,088,001
General & Administrative Expenses 0 97,771 149,877 214,889 139,163
Selling and Distribution Expenses 160,968 101,724 134,518 147,274 209,677
Operating Profit (EBIT) 595,010 83,540 883,119 -262,229 297,268
Financial Charges 2,288 5,956 46,356 305,491 233,651
Net Income Before Taxes 620,193 258,629 1,133,704 -481,649 63,617
Net Income After Taxes 408,683 162,179 705,294 -264,540 75,010
--------------------------------------------------------------------------------------------------
Balance Sheet (Rs '000) FY'04 FY'05 FY'06 FY'07 FY'08
--------------------------------------------------------------------------------------------------
Stores & Spares 19,546 22,878 29,736 50,316 83,101
Stock in Trade 1,708,539 3,159,153 4,169,120 2,704,946 1,612,696
Cash & Bank Balances 3,514,909 5,873,987 360,619 219,859 231,880
Total Current Assets 6,328,907 10,286,487 6,269,918 3,681,213 2,435,529
Total Non Current Assets 670,253 1,506,296 2,904,357 4,623,904 4,381,215
Total Assets 6,999,160 11,792,783 9,174,275 8,305,117 6,816,744
Total Current Liabilities 5,066,925 9,698,369 5,796,972 3,906,115 3,087,066
Total Non Current Liabilities 672,095 1,958,334 500,000
Total Liabilities 5,066,925 9,698,369 6,469,067 5,864,449 3,587,066
Paid Up Capital 420,000 420,000 714,000 714,000 1,428,000
Total Equity 1,932,235 2,094,414 2,705,208 2,440,668 3,229,678
--------------------------------------------------------------------------------------------------
LIQUIDITY RATIO FY'04 FY'05 FY'06 FY'07 FY'08
--------------------------------------------------------------------------------------------------
Current Ratio 1.25 1.06 1.08 0.94 2
--------------------------------------------------------------------------------------------------
ASSET MANAGEMENT FY'04 FY'05 FY'06 FY'07 FY'08
--------------------------------------------------------------------------------------------------
Inventory Turnover(Days) 56.18 54.21 54.29 58.50 43.33
Total Asset turnover 1.34 1.41 2.79 2.05 2.16
Sales/Equity 4.84 7.92 9.48 6.99 4.56
--------------------------------------------------------------------------------------------------
DEBT MANAGEMENT FY'04 FY'05 FY'06 FY'07 FY'08
--------------------------------------------------------------------------------------------------
Debt to Asset(%) 72.39 82.24 70.51 70.61 52.62
Debt/Equity (Times) 2.62 4.63 2.39 2.40 1.11
Times Interest Earned (Times) 292.64 44.42 25.47 -0.58 1.27
Long Term Debt to Equity(%) 0.00 0.00 24.84 80.24 15.48
--------------------------------------------------------------------------------------------------
PROFITABILITY (%) FY'04 FY'05 FY'06 FY'07 FY'08
--------------------------------------------------------------------------------------------------
Gross Profit Margin 8.08 1.71 4.55 0.59 4.26
Net Profit Margin 4.37 0.98 2.75 -1.55 0.51
Return on Asset 5.84 1.38 7.69 -3.19 1.10
Return on Common Equity 21.15 7.74 26.07 -10.84 2.32
--------------------------------------------------------------------------------------------------
PER SHARE FY'04 FY'05 FY'06 FY'07 FY'08
--------------------------------------------------------------------------------------------------
Earning per share 9.70 3.90 16.80 -3.71 0.55
Price earning ratio 9.18 18.97 6.67 -15.63 80.00
Dividend per share 4.25 2.25 1.32 0.00 -
Book value 46.01 49.87 37.89 34.18 16.15
==================================================================================================