Honda Atlas Cars Pakistan Limited was incorporated in 1992. It is a joint venture between Honda Motor Company Limited Japan, and the Atlas Group of Companies, Pakistan. The company is listed on Karachi, Lahore and Islamabad 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 re-conditioned cars affected the growth rate. However, the terms of imports since tightened last year.
RECENT RESULTS 3Q09
The automobile sector has been experiencing serious decline. The locally assembled automobile registered the highest decline in the recent years. The total production of vehicles declined by 33.8% during the period from April 01, 2008 to December 31, 2008, over the same period last year. The industry has been facing multiple challenges, such as: higher exchange rate, rising inflation and material prices and particularly, slow down in demand.
To meet the rising cost of production, prices had been increased a couple of times, which has further affected the sales of the industry. The total automobile production during the period under review of nine months was 88,482 units against 128,492 units last year, down by 31.1%. The sale was 86,376 units against 126,732 units, down by 31.8%. However, Honda's production and sales were 9,644 units and 9,129 units respectively during this period as against production of 12,240 units and sale of 11,847 units in the same period last year.
During the period under review, the company suffered a loss after tax of Rs 154.1 million as against a loss of Rs 0.5 million incurred in the same period last year. The loss was mainly due to depreciation of Pak rupee by 26.2% against the US dollar and 39.7% against Japanese yen since start of the year. The rising prices of steel and other metals in the world market also contributed to the loss.
The leasing factor was almost halted due to strict terms and conditions and rising interest rates, coupled with inflationary pressure forced to shrink the auto industry by 45% from July 2008 onward. However, in these testing times and difficult working conditions, the company has been focusing on cost effective measures to reduce the running cost of business.
The sales revenue was down at Rs 9,900.4 million against Rs 11,064.4 million in the same period last year. Due to factors mentioned above, the cost of sales increased and gross profit for the period under review was reduced to Rs 282.0 million as against Rs 404.9 million in the same period last year. The administrative and selling expenses were reduced by 12.5%, at Rs 239.8 million as against Rs 273.9 million.
The other income was increased to Rs 63.1 million as against Rs 32.4 million. The financial and other charges were also down by 41.5% at Rs 109.5 million against Rs 187.2 million in the same period last year. However, other operating expenses were increased due to exchange loss suffered by the company on certain foreign currency transactions during the period under review.
As per the latest data released by the Pakistan Automotive Manufacturers Association (PAMA), after witnessing a growth since FY02 with 6-year CAGR of 28.0% to 171,786 units in FY07 from 39,047 units in FY01, car sales declined by 4.2% in FY08 and stood at 164.65k units as against 171.79k units in FY07. The low price cars' category was the beneficiary of this shift in customer preference.
The cars with engine capacities of 801cc to 1299cc registered a decline compared to last year. The auto sector in general, has witnessed a slow down owing to the fact that two to three times the car prices were increased by the auto assemblers during last year in order to support their declining gross margins. Auto assemblers have linked the price-hike with rising prices of steel components and appreciation of yen against rupee, which pushed up the production cost.
Further, car financing became more expensive due to increase of 200bps in discount rate by the SBP during 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 new buyers of small cars to switch to motorcycle mainly due to cheaper cost and low fuel consumption.
Among different engine capacity cars, sales volume of low engine capacity cars 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.
Year ending March 2007 was also a bad year for Honda Cars. Not only the sales have 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 an operating loss for 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. HCAR 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 customs 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 all factors that have contributed to decline in sales and increase in costs.
Also, the massive capacity expansion, increasing company's 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 its gross profits despite HCAR rationalizing the production in view of lower sales. HCAR boasts a presence in the 1300-1600cc cars category. It also deals in imported Honda Accord (2400cc). 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 2008HCAR produced 15,080 units during the year 2008 as against 18,240 units in the year 2007. This shortfall was mainly due to overall decline in production of 1300cc and above. The company took certain initiatives to improve its 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 the year 2008 against Rs 17,055 million achieved last year and as discussed before, Honda Cars also bore the brunt of rising prices, depreciation of rupee against the dollar and tight monetary policy stance by the SBP. The cost of goods sold was 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 last year.
The gross profit margin has improved substantially to 4.3 percent of sales against 1.0 percent of sales for last year. Last few months have seen rupee under extreme pressure against the major currencies. The rupee has 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 FY'08.
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 FY'08 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 nose dive, however it is to be understood that foreign competition notwithstanding, other reasons like increased depreciation and financing charges are temporary.
In FY'08, the sales figures of Honda Cars showed a substantial decline and its cars sales volume plunged 22.7% to 14,201 units from 18,361 units in the parallel period last year, mainly due to dull response from the customers toward new model of Honda Civic and the overall slowdown in auto sector owing to the reasons as given below.
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 owing 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 of the company 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 has been 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 engine capacity above 850cc which will increase product price, further dampening the already dwindling auto demand. Further 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 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, rate of General Sales Tax (GST) on car purchase has been proposed to increase from 15% to 16%.
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HONDA ATLAS-FINANCIALS
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Income Statement (Rs '000) FY'04 FY'05 FY'06 FY'07 FY'08
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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
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Balance Sheet (Rs.'000) FY'04 FY'05 FY'06 FY'07 FY'08
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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
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LIQUIDITY RATIO FY'04 FY'05 FY'06 FY'07 FY'08
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Current Ratio 1.25 1.06 1.08 0.94 2
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ASSET MANAGEMENT FY'04 FY'05 FY'06 FY'07 FY'08
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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
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DEBT MANAGEMENT FY'04 FY'05 FY'06 FY'07 FY'08
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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
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PROFITABILITY (%) FY'04 FY'05 FY'06 FY'07 FY'08
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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
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PER SHARE FY'04 FY'05 FY'06 FY'07 FY'08
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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
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