In FY11 the whole automobile industry resurged. Record high exports and foreign inflows in the form of remittances were the chief contributors to this rise. Motorcycle assemblers fared even better than car assemblers in the country, given the bursting demand for two-wheelers in Pakistan.
Several factors have boosted demand for motorcycles in the country, not least among which have been rising agri-incomes fed by higher commodity prices. Moreover, as car prices have trended consistently higher, two-wheelers have remained a popular, cheaper substitute.
Atlas Honda being the largest motorcycle manufacturer of Pakistan is amongst the biggest beneficiaries of the booming market for motorcycles in the country. The company firmly follows its policy of growth, quality and customer satisfaction, achieving record high sales in the process. However, the industry has not exactly spent the last decade on a bed of roses as issues such as smuggling, under-invoicing and other malpractices of some players have continued to cramp more upright firms in the industry.
Company's highlights
Product mix Atlas Honda manufactures three different types of motorcycles: 70cc, 100cc and 125cc. Although sales of all three variants have risen; the 70cc category has been expanded by the most impressive rate of about 17 percent per annum. This is due to the good marketing strategies which focused on the benefits of the engine along with a one-year warranty for these motorcycles.
The company pitches its 100cc motorcycles as the choice for those looking for a comfortable and long drive. Heavier bikes (125cc) have targeted youth and the rise in their sales has been attributed to rising remittances from abroad.
Spare parts too have become important revenue generators for Atlas Honda as the total revenue generated by this segment tallied over Rs 2 billion. Even though spare parts contribute only 6 percent of the total revenue generated; hefty growth of 42 percent in their sales suggests this head may become an important contributor to the company's top line in the future.
However, in order to cash in on the demand for spare parts, the company and others in the industry are relying on the government to take meaningful steps against smuggling and the sale of counterfeit products.
Sales FY11 proved to be an excellent year for the company as it was able to sell more than half million units. The company due to its excellent marketing was able to sell 544,331 units in FY11. The market share for the company stood at almost 68 percent as compared to 65 percent in FY10. The two-wheeler and three-wheeler industry combined grew by roughly 13 percent whereas Atlas Honda outpaced the industry by achieving growth rate of 18 percent over the same period.
Due to its products mix, high brand value and wide dealership network the company has been able to increase its market share. Marketing has played a great role in the company's rise as its slogans of fuel efficiency and company warranties resound among buyers. Another reason behind Atlas Honda's success is its widest dealership network which also supplies genuine parts. Thus despite high competition in the 70cc segment Atlas Honda boasts better after-sales services than most competitors.
Risk management The company managed its supplies by making purchasing contracts with its raw material vendors. It also managed its foreign exchange risk by using different derivatives and forward covers. Short term investments and interest-rate swaps enabled Atlas Honda to minimise interest rate risk.
Profitability The increase in cost of sales mainly due to the increase in prices of raw materials, and rupee to Yen devaluation trimmed the gross profit margin from 7.8 percent of sales in 2010 to 7.5 percent in 2011.
The company was able to bring down its distribution costs by connecting more than 100 dealerships online. This has helped bring down distribution costs and improved efficiency on the sales front.
Finance costs decreased, in line with the company's plan to become debt-free by 2011-12. The decrease in operating expenses and finance costs improved profit before tax which stood at 4.3 percent of sales in 2011 as compared to 4.2 percent in FY10. Overall the profit after tax stood at Rs 1 billion; rising by 40 percent over the tally for FY10. This translated into EPS of Rs 16.03.
Short-Term Solvency and Long-Term Debt Management Atlas Honda retired Rs 0.4 billion of long-term debt following its plan to be a debt-free company by 2011-12. Long-term liability fell from 13 percent of assets in 2010, to 6.7 percent of assets in FY11. Consequently, the company's debt to equity ratio fell to 0.02 in FY11 from 0.2 in the preceding fiscal year.
The current ratio and quick ratio for the company did not experience any significant change as both current assets and current liabilities increased by roughly the same proportions. The increase in current assets was backed by increases in stock in trade; which the company had raised to meet surging demand. The increase in trade payables was the main contributor to the increase in current liabilities.
Outlook In the foreseeable future, energy crises and further rupee devaluation could hinder growth prospects for Atlas Honda. However, lower interest rates are expected to spur economic activity while remittances have also held firm, so local buyers may be more inclined towards new purchases in coming months.
High prices of agri-based commodities have contributed, in no small way, to the stellar demand for two-wheelers in the country. Any major reduction in international prices of cotton, rice and other such produce could spell trouble for the motorcycle industry.
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ATLAS HONDA
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Rs(mn) Unit FY11 FY10 FY09
(9m)
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Gross profit margin % 7.5 7.8 7
Return on assets % 10.4 8.4 3
Return on equity % 21.7 18.3 9
Dividend payout ratio % 50 50 95
Asset turnover times 3.4 3 1.8
Inventory turnover times 12.9 11.9 5.8
Debtor turnover times 81 57.3 42.9
Creditor turnover times 7.1 7.6 4.8
Current ratio times 1.5 1.5 1.3
Quick ratio times 0.9 0.9 0.6
Debt to equity ratio times 0.02 0.2 0.2
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Source: company accounts.
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