Automotive: HONDA ATLAS CARS PAKISTAN - Analysis of Financial Statements - Financial Year 2006 - 1H - Financial Year 2010
Honda Atlas Cars Pakistan Limited (HCAR) is a joint venture between Atlas Group, Pakistan and Honda Motor Company Limited, Japan. The company was incorporated in November 1992 and is listed on all the three stock exchanges of Pakistan. Honda Motor Company Limited is the holding company with 51% shares.
HCAR's principle activities include assembling, manufacturing and selling of passenger cars and spare parts. The company has introduced four new models of Honda Civic and four models of Honda City and it introduced the third generation Honda City on January 31, 2009.
Honda Atlas Cars Pakistan had a market share of 11% in FY09, while Pak Suzuki 52% and Indus Motors a market share of 35%, the two leading car manufacturers in Pakistan. The market share of Pak Suzuki declined to 52% in FY09 from 62% in FY08. Dewan Motor's market share also decreased from 5% in FY08 to just 2% in FY09. However, Indus Motors and Honda Atlas gained in terms of market share. The market share of Indus Motors improved from 26% in FY08 to 35% in FY09. Honda Atlas' market share surged from 7% in FY08 to 11% in FY09. The sales of both Pak Suzuki and Dewan Motors plunged considerably by 56% and 75% respectively. Indus Motors and Honda Atlas also registered lower sales but by 29% and 28% respectively. Although Honda Atlas ranks third in case of car sales, it led the motorcycle segment with a market share of around 72.5% in FY09.
The performance of the car assemblers remained lacklustre during FY09 owing to the economic meltdown in the country. In the wake of rising steel prices, appreciation of yen against the Pak rupee and imposition of 5% FED in the budget FY09, the car assemblers passed on the increase in cost to the consumers. The increase in car prices declined its demand. Also, high interest rates and reduction in car financing facility offered by various banks further depressed the demand of cars. Thus, the industry car sales went down by 50% from 147,441 units sold in FY08 to 74,180 units in FY09. Sales went down mainly in the 800cc and 1000cc categories, which contribute 60% to the total auto sales.
The car sales of Honda Atlas slumped by 28% from 15,487 units sold in FY08 to 11,144 units in FY09. By December 2008, the sale of Honda City had dropped by 83% due to tough competition from Suzuki Liana and Toyota Corolla. However the launch of new Honda City improved its sales and enabled it to improve its market share. The company also launched new model of Honda Accord and CRV in 2400cc categories during FY09.
HCAR rationalised its car production in line with the decline in sales volume. The company produced 4,985 units of Honda Civic during Jul-Jun FY09 as against 5,813 units during Jul-Jun FY08. Similarly the production of Honda City reduced to 6,755 units in Jul-Jun FY09 as compared to 8,220 produced in the corresponding period of previous fiscal year.
RECENT RESULTS (1H10)
The automotive sector improved its performance over this time period as the imported cars face disadvantage in form of increased prices due to rupee depreciation against yen and dollars. Moreover, the excise duty on the local cars has been improved. Despite this, we witnessed an increase in the prices of the local cars as they pass on the impact of inflation to the customers who have no other options.
Production for Honda Civic in the time period July 2009 to December 2009 declined by 27.23%, while sales increased marginally by 0.57%. Honda City fared better with production increase of 21%, while sales increased by 12.5%.
Sales decreased marginally to be Rs 7326 million. Cost of sales however increased to result in a gross loss of Rs 163 million. Administrative and distribution charges have been kept in check as a move to rationalise costs. However, financial charges increased by 502% to Rs 277 million. Net loss after tax was Rs 536 million, as compared to a loss of Rs 52 million in 1H09.
PROFITABILITY (FY09)
The company posted sales revenue of Rs 16.181 billion (for its own manufactured products) during FY09 as compared Rs 16.66 billion during FY08. This increase in sales revenue was despite a 28% decline in its sales volume. This was because the company passed on higher costs to consumers and increased its unit price. However, considerable increase in excise duty and sales tax caused the net sales revenue for FY09 to be 4% lower than that posted during F08. Thus, the company's profitability was hampered by unfavourable budgetary impacts of increase in sales tax by 1%, levy of Federal Excise Duty of 5% and additional taxes at the time of registration of vehicles.
The company was able to keep its cost of sales in check during FY09. The cost of sales in FY09 was 0.82% lower than that incurred in FY08 due to restricted production of cars and cost minimisation. However, lower costs could not restrict the impact of lower sales revenue on the profitability of the company and HCAR registered a 71% decline in its gross profit for the period.
The company managed to curtail its administrative and selling/marketing expenses, however, the operating expenses increased from Rs 5 million in FY08 to Rs 311 million in FY09. The reason for such substantial increase in operating expenses was the exchange loss of Rs 230.787 million suffered by the to company during FY09. The company's operating income of Rs 64.8 million could also not boost the company's profits and it posted an operating loss of Rs 622 million.
HCAR's finance cost for the period was 5% lower in FY09 as compared to in FY08. The interest paid on both its short term and long-term borrowing fell. However, the company posted a loss after taxation of Rs 401.833 million for FY09 as compared to a profit after taxation of Rs 75 million in FY08.
PROFITABILITY (FY06-FY09)
After posting good results in FY06, HCAR showed dismal results in FY07. All the profitability figures took a nosedive. ROA went down because of the dual reason of decreasing returns and increase in asset size. The asset base of the company widened during FY07 due to capacity expansion and introduction of new models. Before and during FY07, the auto industry underwent capacity expansion because of promising demand and the government target to produce 500,000 units by the year 2011. Gross profit margin and net profit margin also declined during FY'07. The performance of the company improved in FY08, despite a fall in sales revenue. The company posted a profit after taxation of Rs 75 million due to lower cost of sales and other expenses. However, the profitability ratios have again slid down in FY09.
LIQUIDITY
During FY09, the company's current assets increased by 61% while its current liabilities increased by 82%. Due to a more than proportionate increase in current liabilities the company's current ratio fell and its liquidity position continued on the downward trend.
Honda's liquidity ratio has been consistently below the industry average. FY07 showed the CR to be <1. Quick ratio has also been quite low, signifying a serious liquidity crunch for the company. The liquidity of the company improved in FY'06 to 1.08 but has fallen since then. The quick ratio of the company increased from 0.70 in 2007 to 0.75 in the year 2008. In order to increase its current and quick ratio further, the company needs to use its resources in more efficient manner to produce more cost-effective.
DEBT MANAGEMENT RATIO
The total liabilities of the company increased by 98% during FY09. The long-term finances of the company increased by 200% during the period and acted as a major contributor to the increased debt. During the year, the company had to resort to bank borrowing to finance capital expenditure of new City and pressure on working capital requirement.
The debt to asset ratio decreased from 62.97% in 2007 to 60.89% in 2008. Debt to equity ratio also decreased from 1.7 in 2007 to 1.56 in 2008. This implied an efficient debt management by the company during the previous years. Also, the company started to retire its long-term debt. Moreover, its financial charges experienced a fall. Also, the proportion of total assets kept as liabilities have also been maintained consistently throughout. Overall, the low ratios indicated proficient use of debt by the company and signal a better solvency picture.
Also, the TIE ratio improved in 2008 indicating that it has became easier for the company to make its future payments in 2008 as compared to how it was in 2007. Also, 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 protected the company in this regard.
ASSET MANAGEMENT RATIOS
The company follows a policy of managing its assets in a consistent manner. Its inventory turnover increased depicting that it took longer for the company to sell its stock in trade. It took the company 79 days to sell its inventory in FY09 as against 43 days in FY08. The total asset turnover ratio deteriorated showing that the asset quality of the company worsened during FY09.
Efficient collection of receivables will help the company provide the needed cash to retire its debt and pay it interest charges. The company also increased its portion of equity through stock dividends in previous years. This indicated a decrease in the reliance on debt and may be better with respect to the debt management, interest payments.
The operating cycle in 2008 was same as it was in 2007. This may be attributed to the better demand in the recent period that resulted in higher sales and inventory. The inventory turnover ratio was also approximately the same as that of last year. The total asset turnover improved slightly over the previous year indicating that assets were managed and utilised in a more productive manner in the year 2008. The sales to equity ratio also depicted an increase and it improved from 5.58 in the fiscal year 2007 to 6.13 in the fiscal year 2008. Overall, the company's performance with respect to asset management has increased in the year 2008 as compared to the year 2007.
During FY08 the year in which cash flow of the company was efficiently managed and the surplus funds were invested in high yielding mutual funds. The inventory was also kept at an optimum level in order to create balance between the production and working capital requirements.
MARKET VALUE
The Company has been a consistent distributor of dividends every year. The board of directors of the company proposed a cash dividend of Rs 6.5 per share (65%) for the financial year ended June 30, 2008. Thus the dividend paid per share had increased from FY07. The company paid a cash dividend of Rs 6.0 per share (60%) in FY07. Owing to the dividend policy and a good performance of the company in FY08, the market price per share has increased from that in 2007.
The average share price during the period 1st April 2009 to 21st August 2009 has been around Rs 15 per share.
FUTURE OUTLOOK
The auto industry is currently faced with a number of problems. There is increased competition from imported cars and importantly used cars. This is threatening the future domestic sales in the country. The inflationary pressure and unfavourable economic conditions are decreasing the purchasing power of the middle-income population and thus hampering demand. Cost of imports has also increased due to rupee depreciation.
However, declining interest rate in the economy is a promising sign for the future sales of the sector. Also, the elimination of 5% FED in the Budget 2009-10 has provided a relief to the auto sector.
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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 FY'09
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Total Revenue 9,358,369 16,587,217 25,638,698 17,055,115 14,715,495 14,149,646
Cost of Goods Sold 8,602,391 16,304,182 24,471,184 16,955,181 14,088,001 13,973,144
General & Administrative Expenses 0 97,771 149,877 214,889 139,163 139,749
Selling and Distribution Expenses 160,968 101,724 134,518 147,274 209,677 190,088
Operating Profit (EBIT) 595,010 83,540 883,119 -262,229 297,268 -399,516
Financial Charges 2,288 5,956 46,356 305,491 233,651 222,769
Net Income Before Taxes 620,193 258,629 1,133,704 -481,649 63,617 -622,285
Net Income After Taxes 408,683 162,179 705,294 -264,540 75,010 -401,833
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Balance Sheet (Rs'000) FY'04 FY'05 FY'06 FY'07 FY'08 FY'09
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Stores & Spares 19,546 22,878 29,736 50,316 83,101 101,942
Stock in Trade 1,708,539 3,159,153 4,169,120 2,704,946 1,612,696 2,954,091
Cash & Bank Balances 3,514,909 5,873,987 360,619 219,859 231,880 20,487
Total Current Assets 6,328,907 10,286,487 6,269,918 3,681,213 2,435,529 3,929,738
Total Non Current Assets 670,253 1,506,296 2,904,357 4,623,904 4,381,215 6,012,350
Total Assets 6,999,160 11,792,783 9,174,275 8,305,117 6,816,744 9,942,088
Total Current Liabilities 5,066,925 9,698,369 5,796,972 3,906,115 3,087,066 5,614,243
Total Non Current Liabilities 672,095 1,958,334 500,000 1,500,000
Total Liabilities 5,066,925 9,698,369 6,469,067 5,864,449 3,587,066 7,114,243
Paid Up Capital 420,000 420,000 714,000 714,000 1,428,000 1,428,000
Total Equity 1,932,235 2,094,414 2,705,208 2,440,668 3,229,678 2,827,845
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LIQUIDITY RATIO FY'04 FY'05 FY'06 FY'07 FY'08 FY'09
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Current Ratio 1.25 1.06 1.08 0.94 0.80 0.70
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ASSET MANAGEMENT FY'04 FY'05 FY'06 FY'07 FY'08 FY'09
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Inventory Turnover(Days) 56.18 54.21 54.29 58.50 43.33 78.73
Total Asset turnover 1.34 1.41 2.79 2.05 2.16 1.42
Sales/Equity 4.84 7.92 9.48 6.99 4.56 5.00
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DEBT MANAGEMENT FY'04 FY'05 FY'06 FY'07 FY'08 FY'09
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Debt to Asset(%) 72.39 82.24 70.51 70.61 52.62 71.56
Long Term Debt to Equity(%) 0.00 0.00 24.84 80.24 15.48 53.04
Debt/Equity (Times) 2.62 4.63 2.39 2.40 1.11 2.52
Times Interest Earned (Times) 292.64 44.42 25.47 -0.58 1.27 -1.79
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PROFITABILITY (%) FY'04 FY'05 FY'06 FY'07 FY'08 FY'09
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Gross Profit Margin 8.08 1.71 4.55 0.59 4.26 1.25
Net Profit Margin 4.37 0.98 2.75 -1.55 0.51 -2.84
Return on Asset 5.84 1.38 7.69 -3.19 1.10 -4.04
Return on Common Equity 21.15 7.74 26.07 -10.84 2.32 -14.21
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PER SHARE FY'04 FY'05 FY'06 FY'07 FY'08 FY'09
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Earning per share 9.70 3.90 16.80 -3.71 0.55 -2.81
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COURTESY: Economics and Finance Department, Institute of Business Administration, Karachi, prepared this analytical report for Business Recorder.
DISCLAIMER: No reliance should be placed on the [above information] by any one for making any financial, investment and business decision. The [above information] is general in nature and has not been prepared for any specific decision making process. [The newspaper] has not independently verified all of the [above information] and has relied on sources that have been deemed reliable in the past. Accordingly, the newspaper or any its staff or sources of information do not bear any liability or responsibility of any consequences for decisions or actions based on the [above information].