Pakistan's largest motorcycle manufacturer Atlas Honda Limited (AHL) was formed in 1988. The company was formed as a result of a merger between Panjdarya Limited and Atlas Auto Limited. It is a joint venture between Atlas group and Honda Motor Corporation-Japan.
AHL has an annual production capacity of 750,000 units. The company operates two plants, situated in Karachi and Sheikhupura. The motorcycle manufacturer has developed a countrywide network of more than 1,600 after sales service and spares parts dealers.
AHL's motorcycles are known for their high quality, reliability and after sales service. High brand equity and reasonable prices have enabled the company to attract buyers from outside Pakistan. Right now the company is exporting mostly to Bangladesh and Afghanistan.
Industry highlights The auto and allied industry saw robust demand during the six months ending September 2011. The resurgence in demand for both two wheelers and four wheelers is attributable to the record high exports and remittances and higher food commodities prices.
During the 1QFY12 exports stood at around 7.3 billion dollars; 18 percent higher than the level achieved in the same period in FY11. During the period, a favourable monetary policy change in the form of a cut of 150 basis points in the discount rate was seen as a significant aid in bringing down the cost of financing for the company.
However over the same period, international oil prices went up by 45 percent exerting an upwards pressure on the cost of production. The spike in oil prices, at times of worst load shedding in the history of Pakistan kept the manufacturing sector under immense pressure.
During the period under review a total of 454,566 units of two wheelers and three wheelers were sold, which represents an increase of 16 percent compared to the same period last year. Honda being the biggest motorcycle manufacturer was the biggest beneficiary.
Company's performance Record turnover AHL kept hold of last year's sales momentum during the six months ending September 2011. Consequently the total turnover reached Rs 19.4 billion. This is an increase of 26 percent compared to the same period in 2010. On unit basis, the company was able to sell more than 315,000 units in the 6M2011, representing growth of 20 percent compared to the level it managed to sell in 6M2010.
The company attributed the volumetric growth to the efficient utilisation of rising demand and a better product mix. Company has also been attributing strong growth to escalating fuel cost, gas shortage and rising car prices.
Easy access to counterfeit and smuggled auto parts to Pakistani markets is challenging the spare parts segment of the business. Despite this, AHL experienced healthy growth in the spare parts segment, which has become a significant contributor to the top line, as the number of motorbikes on roads has skyrocketed.
Profitability The gross profit for the period under review grew from Rs 1.13 billion in 6M2010 to Rs 1.36 billion in 6M2011. Despite the increase, the gross margins declined from 7.4 percent to seven percent in 6M2011. This decline is attributed to the increase in raw material prices (steel), rising energy cost and depreciation of the local currency against the Japanese Yen.
Steel prices were up by roughly eight percent in 6M2011, compared to the same period last year. Over the same period Pak Rupee depreciated by 12 percent against Yen. On the operating side the margin declined from 4.5 percent in 6M2010 to 4.2 percent in 6M2011, despite restraining the distribution and administrative expenses to 3.3 percent of sales in 6M2011 compared to 3.6 percent in 6M2010. The carry over effect of lower gross margin is one of the main reasons behind worsening operating performance.
On the bright side, better treasury management led to a 65 percent increase in other income. In addition timely payment of borrowings led the company to successfully manage and retain its status of being a debt free company in 2011. Overall, on absolute basis the return on assets and return on equity raised by 27 percent and 29 percent in 6M2011 against the same period previous year.
Risks and operations The company faces high interest rate, foreign exchange, credit, and liquidity risks. The company is using different derivatives and forward covers to manage its foreign exchange risk.
Purchasing contracts with major raw material suppliers also helped AHL to reduce its risk. By achieving the goal of having no non-current debt AHL has reduced the sensitivity of liquidity risk. AHL's inventory management dwindled slightly in 6M2011 as inventory turnover fell from 7.14 in 6M2010 to 6.72 in 6M2011. However AHL's asset turnover increased, pointing to better utilisation of assets.
Outlook As far as the sales are concerned, AHL has got prospects in times to come. The bike manufacturer would continue to benefit by strong demand from the rural side. In addition, the stability seen in the steel prices would further ease the pressure. The recent upwards revision of the wheat support price is also expected to further increase farmer income. However the rising oil prices and worsening power situation continue to threaten profitability margins for the company.
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Atlas Honda
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6M2011 6M2010 chg
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Gross profit margin 7.0% 7.4% -5%
Return on assets 5.7% 4.5% 27%
Return on equity 12.0% 9.3% 29%
Asset turnover 1.92 1.61 19%
Inventory turnover 7.24 7.72 -6%
Current ratio 1.43 1.45 -2%
Total debt to equity ratio 1.12 1.08 3%
Non-current debt to equity 0.14 0.14 -1%
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SOURCE:Company accounts
COURTESY: Economics and Finance Department, Institute of Business Administration, Karachi, prepared this analytical report for Business Recorder.
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