Atlas Honda Limited (AHL) was established in 1988 as a result of a joint venture between Atlas Group and Honda Motor Co Ltd, Japan. Atlas is a well-diversified group with its stakes in engineering, power generation, trading, and financial services sector. The group consists of seven public limited companies and seven private limited companies within its folds.
AHL is one of the star companies of the group, currently in the business of manufacturing and marketing Honda motorcycles in collaboration with Honda Motor Co. Besides this, the company also produces various hi-tech components in partnership with state-of-the-art parts manufacturers like Showa Atsumitech, Nippon Denso and Toyo Denso. The company has two production plants located at Karachi and Sheikhupura with annual production capacity of over 750,000 units. To expand its reach to the customers, the company has established a wide network of 1,600 sales service and spare-parts dealers. Not only this, the company has also set up warranty and training centers in Karachi and Lahore.
The company currently sells CD-70, Pridor, CG-125 and Deluxe under its premium brand name Honda. Apart from catering the local market, the company also exports its products to Bangladesh and Afghanistan. In order to achieve self-sufficiency in its motorcycle manufacturing operations, Atlas group has recently signed a joint venture with DENSO Corporation with an aim at producing superior quality motorcycle parts in the country. The new company Atlas Hi-tech will instigate its operations in October CY13.
Performance Review, FY12 During the period under consideration, the company's top line posted an impressive growth of 17 percent and attained an unsurpassed sales figure of 38 billion.
The motorcycle segment touted a staggering growth of 11.1 percent. The company attributes this sales growth to its superior rural penetration as the company believes that the major demand of two-wheeler comes from the remote areas. To cater the rural market effectively, the company has launched smart sales points (SSP) to enhance its presence in the remote areas. Spare parts, the other segment of AHL, though encumbered by forged, smuggled components, garnered 30 percent sales growth for the company with sales tally Rs 2.6 billion.
Despite significant sales growth, the company's gross margin remained strained during the period, hinging at 7.3 percent as against 7.5 percent in FY11, owing to high material prices, Pak Rupee depreciation, high energy cost etc.
During the period, the company's operating expenses surged by 15 percent mainly on the back of huge spending on promotional and advertising activities to derive sales and also because of expansion in dealership network. During the period, the company expanded its dealer network to include 580 dealers as against 470 dealers in FY11.
On the flip side, the other operating income demonstrated a plunge of eight percent. Consequently, the operating profit margin slipped from 4.6 percent to 4.2 percent.
The key striking factor in company's FY12 profit and loss statement is the massive dip of over 87 percent in the financial cost which buttressed the company's bottom line to an enormous extent. In FY12, the company demonstrated the highest ever profit before tax figure of 1.6 billion. Profit after tax also propped up to 1.2 billion, up 20 percent from the previous year which translated into an EPS of 16.74 as against 13.94 in FY11.
Performance-scan over the years (FY09-FY11)The company's top line touts growth in each year since FY07, except for a seven percent dip experienced in FY09. However if we draw a yearly comparison, this sales growth comes at a decelerated pace, shrinking from 31 percent in FY10 to 17 percent in FY12.
The sales dip in FY09 comes on the heels of high cost of production, rupee devaluation and exorbitant interest rates which forced the company to raise its prices. Higher prices combined with reduced purchasing power resulted in low customer base and dwindling sales volume during the period. Thus, in FY09, AHL's bottom line dropped off by 48 percent YoY.
FY09 proved to be harsh not only for AHL but for the entire industry, whereby the industry sales volume dropped to 800,000 units from one million, the previous year.
However, in FY10, the company rebounded from the previous year's lows, touting a top line growth of 31 percent. This growth comes on the back of variety of new models launched by the company in both 70 cc and 125 cc categories.
Despite severe cost pressures and currency devaluation, the company was able to control its cost and fetch a healthy GP margin of 7.8 percent as against 6.9 percent in FY09. During FY10, albeit company's operating expenses surged by over 70 percent, this glum factor was countered by a significant growth of 35 percent in the other income which was achieved mainly because of significant growth in interest on company's deposits and increase in the fair value of company's investments. Moreover, a momentous dip of 68 percent was achieved in the financial cost. All this contributed in attaining a bottom line growth of 95 percent in FY10.
FY11 proved to be another blissful year for the company. A volume growth of 24 percent was accomplished by the company. The company crossed the threshold of 500,000 units and ended the year with the sales volume of 544,331 as against 440,054 units in FY10.
Growth in motorcycle segment remained resilient during the period with CD 70 and CG 125 proven to be the best selling brands in 70cc and 125cc categories respectively. Spare parts segment also posted a progressive growth of 42 percent, with sales closing above two billion rupees.
The gross margin shriveled due to escalated cost of sales particularly high utility charges and rupee devaluation against Japanese Yen. Operating expenses also surged due to volume related expenses and new promotional campaigns launched during the period such as "Faiday ka Engine", Ecorun competitions etc. However, the growth in other income and drop in financial cost sustained the bottom line which posted a YoY growth of 41 percent in FY11.
Liquidity and Cash Flows AHL's liquidity positions perks up over the years, illustrated by its current ratio rebounding from 1.3 in FY09 to 1.5 in FY12. This comes on the heels of company continuously streamlining its capital structure with D/E ratio ranging from 1.2 in FY09 to 1.00 in FY12.
Free cash flow from operations also recoils year on year, standing at Rs 2.2 billion in FY12 as against two billion rupees in FY11. The same have been employed for repayment of debt, investment in capital assets and dividend payouts.
Future Prospects The beginning of FY13 proved to be quite encouraging for the company. The net sales for the first quarter stood at Rs 10.1 billion, an increase of 2.8 percent over the corresponding year. The EPS stood at Rs 4.2 as against Rs 3.6 in 1QFY12.
The two-wheeler industry, having achieved 95 percent localisation, is apparently standing on its feet. It is not only able to meet the local demand but also capable of exporting various models to various countries.
However, the recent government's decision to reduce duties on motorcycle parts has badly shaken the confidence of the investors and local manufacturers. Allowing new investors to import all motorcycle parts at a reduced duty would negate the previous policies and discourage all OEMs (original equipment manufacturers) to produce parts locally, thus rolling up the deletion plan achieved after constant efforts.
At a time when motorcycles are being sold at $110 to $1,200 in other countries, in Pakistan they are being sold at less than $500 due to localisation. However, the country would turn into a trading hub if the proposed policy is approved and implemented as local players would prefer importing motor cycles rather than manufacturing them locally. This will also particularly hit AHL hard as Atlas Group has recently partnered with DENSO Group with an equity investment of 7.2 million dollars to locally manufacture the motorcycle components.
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Atlas Honda Limited
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2012 2011 2010 2009
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PROFITABILITY
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Gross profit margin % 7.30% 7.50% 7.82% 6.93%
Operating profit Margin % 4.29% 4.62% 4.66% 4.70%
Net profit margin % 3.17% 3.08% 2.79% 1.88%
ROCE % 19.58% 19.02% 14.24% 8.54%
ROA % 10.99% 10.42% 8.36% 4.94%
ROE % 22.22% 21.69% 18.31% 10.98%
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LIQUIDITY
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D/E times 1.02 1.08 1.19 1.22
Net Working capital Rs In mm 2,166 1,972 1,741 819
Current ratio times 1.45 1.45 1.49 1.26
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ACTIVITY
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Total asset turnover times 3.47 3.38 3.00 2.63
Fixed asset turnover times 9.54 9.86 7.83 5.63
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