advanced financial management - · pdf file04.04.2013 · advanced financial...

Advanced Financial Management (2012)

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ADVANCED FINANCIAL MANAGEMENT Automobile and Parts Industry

Submitted to: Mr. Abdul Jabbar Kasim

Submitted by:

Madeeha Malik

Adeel A. Siddiqui

Date of Submission: August 07th, 2012.


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Table of Contents Executive Summary ........................................................................................................................... 3

Industry at a Glance – Taking the Bull by its horns ............................................................................. 4

Financial Comparison ........................................................................................................................ 4

Key Financial Ratios ....................................................................................................................... 4

Profitability/Efficiency Ratios ......................................................................................................... 6

Earnings per Share and Break-up Value ......................................................................................... 7

Competitor Analysis .......................................................................................................................... 8

Past Performance Analysis ........................................................................................................... 12

Al-Ghazi Tractors Ltd. ............................................................................................................... 12

Atlas Honda Ltd. ...................................................................................................................... 15

Atlas Battery Ltd. ..................................................................................................................... 17

Indus Motor Company Ltd. ...................................................................................................... 19

Exide Pakistan Ltd. ................................................................................................................... 21

Ghandhara Nissan Ltd. ............................................................................................................. 23

HinoPak Motors Ltd. ................................................................................................................ 25

Honda Atlas Cars ...................................................................................................................... 27

Millat Tractors Ltd. ................................................................................................................... 29

Pak Suzuki Ltd. ......................................................................................................................... 32

Analysis Report: ............................................................................................................................... 34

Indus manages to keep costs consistent as it lures investors and rewards shareholders. ............. 34

Summary ......................................................................................................................................... 35


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Executive Summary

This report encompasses the use of the benchmarks identified taught to us in the Advanced Financial Management class of Summer Semester 2012. The following report gives an insight on the performance of Indus Motors Company in the year 2010. Indus motors are one of the largest in automobile sector of Pakistan. The report gives a detail analysis of the company from year 2005. Also there is comparison within the industry in past two years. For this purpose the key financial ratios, profitability ratios and key performance indicators are considered.

By analysis it became obvious that Indus motor is prominent among its competitors, it shows high growth, consistent high gross profit margin and dividend payout ratio. The high earning per shares and consistent dividend payout ratio is pulling the investors to invest in Indus

It starts off with an Industry Analysis of the Automobile and Parts sector of the Karachi Stock Exchange. Travelling further to the nearest competitor analysis. Our main company is Indus Motors; it is compared to the Industry averages and analyzed upon.

Furthermore, the nearest competitors in terms of business and turnover to Indus Motors are Atlas Honda Ltd and Pak Suzuki. The three companies have been compared on the basis of a few important key performance indicators.

The past performance trend analysis has been shown for each of the ten companies including Indus Motors. It encompasses sales growth, asset growth, net profit margins and performance measurements such as return on assets and return on equity, which the class has studied throughout the course.


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Industry at a Glance – Taking the Bull by its horns Earning 4.39% NPBT of the Market Overall NPBT of listed Companies, which is PKR 13.6 billion, Motor Vehicles, Trailers and Auto Parts Industry showed quite impressive financial indicators, during 2010. Although, this industry’s average Earnings per share after taxes, which is PKR 9.54, were twice as higher than the Market Overall average, which is PKR 4.11, the industry still strives to attract more paid up capital, which increases by 2.39% from the previous year, but still holds 3.91% of the total investment in the stocks market. The total paid up capital increased during 2010 was PKR 49.7 billion, which is 10.38% of the previous year, whereas it increased by PKR 182.5 million for this industry, which is 2.39% of the previous year, yet, 0.37% of the total increase.

Whereas, total shareholders’ equity increased by 10.30%, which is PKR 5.1 billion, supported the industry’s overall growth, but it is relatively slow. This can be considered as a foresighted result, of few unpredictable market fall outs, and economic crunches, which weakened the investors’ trust in the market and its mechanisms, and decreased overall growth in Investments. Two if its companies were rated amongst top 25 Companies, Atlas Battery Limited and Al Ghazi Tractors Limited, which were stone cold fox for the investors, and played a significant role in improving overall industries financial indicators. The Profitability Ratios of this Industry, that is ROA 12.55 times, ROE 26.97 times and ROCE 23.45 times, were relatively higher than overall Market Average, that is, ROA 8.15 times, ROE 23.88 times and ROCE 13.68, which makes this industry much more attractive and interesting to invest in. Now for the Capital Formation, the Industry of Motor Vehicles, Trailers and Auto Parts, maintained 53% of debt while market average was 65%, as it was largely financed by Shareholders Equity, which was 47% of the Total Assets. Its capital formation is composed of 48.48% of Current Liabilities, 4.80% of Non Current Liabilities and 46.63% of Shareholders’ Equity.

Taking the bull by its horns was not easy, but even with weakened trust of investors in stock market and unstable and heavily fluctuating for-ex and commodity indices, which generate opportunity of earning higher margins, Motor Vehicle, Trailers and Auto Parts industry struggled and partially succeeded to run the matinée during 2010.

Financial Comparison To generate acute and precise analysis and comprehension on this Industry, we have chosen ten companies, out of twenty two listed. Following are the financial comparisons, a lucrative approach to analyze the performance of the industry during 2010.

Key Financial Ratios The industry’s current assets were 73.04% of the total, which were more than sufficient as they are 1.51 times of current liabilities, therefore overall the Industry capital formation can be considered strong. Whereas this is largely because of the capital structure of Al Ghazi Tractors limited, as it is in principal equity financed, showed a remarkable Current Ratio, that is 5.85:1, and lowest Debt Equity Ratio, that is 0.2:1. If we compare three key financial ratios of the industry with few companies, as shown in the histogram (Figure 1), we can easily identify the favorable outliers within them. Amongst them all Al Ghazi showed potency, as its Net Profit Margins were 19.42%, three times larger than industry average, which is 6.02%, and it owns 6.53% of the Total Industry Assets. According to Performance Ratios, Al Ghazi Tractors Limited performed well during 2010, and it stands with a strong liquidity characteristics.


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With a little low current ratio of 1.42:1 as compared to 1.51:1 of the industry and relatively higher Debt to Equity Ratio at 1.67:1 as compared to the industry average of 1.14:1, still Millat Tractors Limited followed Al Ghazi, by earning NPM almost three times the industry average, which is 16.18%. Its total Assets were 10.38% of the Industry Total, which is PKR 4.5 billion higher than Al Ghazi.

Figure 1: Key Financial Ratios

Indus Motor with 23.13% of the total Industry Assets, largest asset size, was trying to catch up Millat and Al Ghazi, with 8.72% NPM. Whereas, current ratio of 1.67:1 as compared to 1.51:1 of the Industry and Debt to Equity Ratio of 1.16:1 as compared to1.14:1 of the Industry demonstrated that Indus is relatively stable in terms of liquidity as compare to Millat.

Whereas, Atlas Battery Limited with lowest level of Total Assets, that is PKR 1.5 billion, was much stable as compared to Millat and Indus, in terms of liquidity, with current ratio of 1.39:1 and Debt to equity Ratio of 0.76:1 and 8.48% of NPM makes it better choice invest than Indus.

Atlas Honda and Exide Pakistan, showed low current ratios and high debt to equity ratios and managed to generate NPM of 4.22% and 4.90% respectively, which were lower than the industry average of 6.02%, struggling to break into the above average zone.

Whereas, the Current Ratio of 3.01:1 and Debt to Equity Ratio of 0.33:1, significantly showed that Pak Suzuki was strong at liquidity, while it generated as low NPM as 1.52%.

But Ghandhara Nissan, Honda Atlas Cars and HinoPak Motors Limited, remained below the zero line during 2010 and reported losses, as much as PKR 123.61 million, PKR 987.98 million and PKR 130.42 million, respectively.

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Profitability/Efficiency Ratios The overall industry’s returns were relatively higher than market average, but some of the Companies exhibit remarkably higher returns as compared to any of the others. During 2010, as the Liquidity of Al Ghazi Tractors Limited was fairly significant than other companies, which was mainly due to its capital structure being mainly dependent on Equity Financing, but Millat Tractors Limited utilized its resources well and exhibit best returns out of the selected companies. Al Ghazi being equity financed, exhibited ROA 38.55 times, ROE 49.23 times and ROCE 48.75 times, as compared to industry average of ROA 12.55 times, ROE 26.07 times and ROCE 23.45 times, which is fairly lower than Al Ghazi. ROCE of 48.75 times compares earning with capital invested and therefore, indicates that management has utilized investment in a better way as compared to the previous year.

Whereas Millat Tractors Limited exhibits higher ROE and ROCE than Al Ghazi, that is 89.45 times and 87.65 times, this is significantly higher than Al Ghazi and Industry Average. Whereas, ROA of 37.92 times is higher than industry but a little lower than Al Ghazi, as Al Ghazi was equity financed and its Assets were well utilized, whereas Millat utilized its debts and equity well, by leveraging and increasing Net Profit Margins.

Figure 2: Profitability/Efficiency Ratios

Now Atlas Battery and Indus Motors were struggling to increase the return, and they were right behind Al Ghazi with Atlas Battery at ROA 24.91 times, ROE 43.66 times and ROCE 38.78 times and Indus Motors at ROA 21.92 times, ROE 45.82 times and ROCE 44.21 times. If we compare their effort together, Atlas Battery utilized its assets well, while Indus Motors utilizes equity and managed capital well.

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Then follows Atlas Honda and Exide, whereas profitability performance is concerned, but Ghandhara Nissan, HinoPak Motors and Honda Atlas Cars, were least at profitability performance. They exhibited losses and negative returns. Their efficiency was the lowest and this highlights the facts that their assets, equity and capital were badly utilized and wasted.

Earnings per Share and Break-up Value The industry Average of Earning per share after taxes was PKR 9.54 which was twice as high as the market average of PKR 4.11. The highest level of earnings per share after taxes was offered by Millat Tractors and then Al Ghazi, which is PKR 88.17 and PKR 44.46, respectively. Millat made almost 9 times higher earnings per share after taxes as compared to industry average, whereas Al Ghazi made almost 4 times higher, which makes Millat’s earnings per share twice as higher as Al Ghazi. Whereas Indus Motors, Exide Pakistan, Atlas Battery and Atlas Honda, made PKR 43.81, PKR 34.92, PKR 26.52 and PKR 13.10. Indus Motors were catching up Al Ghazi. Pak Suzuki made PKR 2.35, which is lower than industry average, whereas it is not negative, but Ghandhara Nissan, HinoPak and Honda Atlas Cars were negative.

Figure 3: Other Indicators

Exide Pakistan offered the highest breakup value, which is PKR 203.55, which is thrice as higher as the industry average of PKR 66.73. The Breakup Value of Pak Suzuki was following Exide Pakistan at PKR 176.33 and Indus Motors were catching them up at PKR 160.15. Then Millat Tractors, Al Ghazi, HinoPak Motors, Atlas Battery and Atlas Honda followed them, but breakup value share of Gandhara Nissan and Honda Atlas Cars is lower than industry average.

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Competitor Analysis Pakistan’s Automobile industry is dominated by Japanese Automakers namely Suzuki, Toyota and Honda. For nearly two decades now, this industry has boomed and created employment in millions directly as well as indirectly. The industry is one of the highest tax paying industries in Pakistan.

Pak Suzuki motors and Atlas Honda are the closest competitors of Indus Motor Company. The performance of Indus Motors Company is distinctive during the period 2009 and 2010 as its Return on equity and return on assets shows. Return on equity was substantially high as compared to Atlas Honda and Pak Suzuki which is lagging behind with return on equity 2.9 and 4.5, and return on assets of 2.3 and 3.5 in year 2009 and 2010 respectively. Atlas Honda and Indus Motors show efficient ROA and ROE as both the companies showed aggressive returns in 2010 in comparison to previous year.

In year 2009, largely growth of the three companies in terms of sales declined as indicated by negative values. The overall industry went through a financial crunch in the fiscal year 2009. This was due to the recession that hit the international markets and ultimately had its telling effect on our local industry. More importantly Banks suffered the most by recession and resultantly it had the effect on the automotive industry as well. Before 2008, banks were offering car lease at very nominal interest rate which resulted in massive leasing by general public. When interest rates shot up it dealt a killer blow not only to the banks but the car manufacturers as well. The industry as a result had to face a tumultuous period. However the year 2010 turned things in a positive direction for the industry. Atlas Honda recovered and shows a boost as compared with Pak Suzuki and Indus motors. Automobile industry has shown growth in year 2010 with the increase of almost 14%.

A significantly high asset growth is observed in Pak Suzuki motors in 2010 and it shows improvement from the year 2009, also it is better than its rivalries , Indus Motors and Pak Suzuki Co.

The EPS trend in three companies is low with the exception of Atlas Honda Co which shows Rs.13.1 EPS in year 2010.The company shows massive improvement financially in 2010 which can be very comforting for the investors. The EPS of Indus motors is escalating gradually from 1.3 in 2009 to 1.6 in 2010. As far as DPS is concerned Indus motors has higher DPS than EPS in year 2009 and 2010 which logically contradicts. In the same fiscal years Pak Suzuki motors paid 0.5 rupees dividend per share to its shareholders, far lower than the earning per share.

There is aggressive financing trend being observed in Atlas Honda co. and Indus Motors co with a profit margin of 8.7 and 24.2 for Indus motors and Atlas Honda respectively in year 2010. Since automobile industry is a capital intensive industry the debt to equity ratio is within 1.09 to 1.22 in 2009 and 2010. Pak Suzuki motors has conservative approach in its financing decisions and consistently low profit margin of 1.57% in 2009 and 1.52% in year 2010. The net profit margins of Atlas Honda and Indus Motors Company have shot up, due to high localization of parts. The companies have invested in the vendor industry and now the percentage of local parts has increased substantially. As a result, the costs have shrunk for the two companies and they have enjoyed greater profit margins.


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Market value of both the competitors of Indus Motors has grown from 2009 to 2010. Honda atlas is marching along Indus with market value of Rs.241, Pak Suzuki showed moderate growth from Rs.72 to Rs.85 from year 2009 to 2010 with a high book value than the other two players. Market value doesn’t necessarily prove to be a direct benefit for the company but it does give off positive vibes of the company in the stock market.

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Past Performance Analysis

The trends must be identified graphically not only for an accurate analysis of each company but also for it to be easy on the eye of the reader. The motor vehicle industry is vast and in much detail. The following key performance indicators have been graphically represented over the years to create charts for trend analysis:

1. Book-Value/Share (BVPS) and Earning Per Share (EPS). 2. Sales, Total Assets and Net Profit growth trends. 3. Current Ratio and Debt to Equity Ratio. 4. Return on Equity (ROE) and Return on Assets (ROA) trends. 5. Dividend Per Share (DPS).

Al-Ghazi Tractors Ltd.

Figure 4: BVPS and EPS Trends


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Figure 5: Sales, TA and Net Profit Trends

Figure 6: Current Ratio and D/E Ratio


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Figure 7: ROE and ROA Trends

Figure 8: DPS Trend


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Atlas Honda Ltd.




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Figure 11: CR & D/E Ratio

Figure 12: ROE & ROA Trends

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Atlas Battery Ltd.


Figure 14: Sales, TA and NP Growth Trends


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Indus Motor Company Ltd.

Figure 17: BVPS and EPS

Figure 18: Trend Analysis for Sales, TA and NP


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Figure 20: CR & D/E Ratios


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Figure 21: DPS for Indus Motors

Exide Pakistan Ltd.

Figure 22: Sales, TA and NP Trend Analysis


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Ghandhara Nissan Ltd.



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Figure 27: ROE and ROA



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Figure 29: CR and D/E Ratio

HinoPak Motors Ltd.



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Figure 32: Sales, TA and NP Trends


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Honda Atlas Cars

Figure 34: BVPS and EPS Trend


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Figure 35: Sales, TA and Net Profit Trend



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Millat Tractors Ltd.



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Figure 39: Sales, TA and Net Profit Trend

Figure 40: ROE and ROA Trend


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Figure 41: Current Ratio and D/E Ratio

Figure 42: Dividend Per Share Graph


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Pak Suzuki Ltd.

Figure 43: BVPS and EPS Pak Suzuki

Figure 44: Sales, TA and NP Five Year Analysis

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Figure 45: ROE and ROA Analysis

Figure 46: CR and Debt to Equity Ratio


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Analysis Report:

Indus manages to keep costs consistent as it lures investors and rewards shareholders.

Indus Motor Company is one of the largest, if not the largest, automobile producer in Pakistan. Not only is it a market leader in terms of turnover but it is also a trusted brand among consumers and investors. The collaborated Indus Motors (Toyota Corporation Japan and Indus Motor Company) has been able to maintain standards of high performance for years to come. Our analysis stretches all the way back to the year of 2005.

The degree of expansion Indus Motors has gone through is astonishing over the years; an average growth rate of 27.4% per year in the non-current assets on the balance sheet speaks for itself. That is an immensely high statistic which brings us to the question, “How?”. The answer to that question is quite simple; the company not only has been paying off its short term loans over the years (2006 and 2007) but they also have been consistently building up the general reserves. Furthermore, with an average increase of 13% per year in Sales which have now crossed the Rs.60 million mark in 2010 explains for the rapid re-investment that the company has gone through.

Consistent gross profit margins can mean only one thing with increasing sales at an average of 13% per year, Indus Motors has hit a home run in the matter, by keeping COGS constant over the year. Managers have every right to be wary of COGS; and without a good gross profit margin, the company can suffer losses due to operational costs.

The performance indicators known as Return on Equity (ROE) and Return on Capital Employed (ROCE) were near the dazzling and glamorous 75% mark in 2006. But obviously being a one time thing; it declined to a mere 44.5%, do not be fooled; even a mere 44.5% is a more than welcoming return on equity for an investor or shareholder.

How is Indus Motors attracting more investors? Not a simpler answer than this; their Earning Per Share for the year of 2010 stands at a ravishing Rs. 43.81 per share. Now, both you and I would end up trying to investing in this company and holding the stock, afraid of the greed that might come with the idea of capital gains. But there is always two sides to one story; whereas, the EPS may be sky-rocketing for Indus Motors at the moment but without a consistent dividend payout; how does a company keep its shareholders happy?

By maintaining a consistent dividend payout; what Indus Motors has exactly been able to do. They have gone out and been honest to their shareholders, shown them that they can make this company grow even more; just look at the figures for growths in Fixed Assets and Turnover. It really is amazing. And here they are, offering a consistently increasing dividend payout ratio from the range of Rs.0.8/share to Rs.1.6/share. If I had the funds; Indus Motors would definitely be worth the buy. That’s what we call attracted and invested!


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Summary

Advanced Financial Management is one of the main fundamental courses for the degrees majoring in finance. Whether it is an MBA, BBA or B.Sc degree; AFM has become one of the core courses that every finance graduate must perfect before being able to work.

It is quite simple; the methodology throughout the course has not been theoretical as much as it has been practical. At the start of the course, we came in with knowledge of finance in theory. After clearing advanced courses such as Investment Analysis, Financial Derivatives and Analysis of Financial Statements; the theoretical understanding has been present. What we lacked as a group and as individuals was the practical implication each of these courses outline.

With this project; it has helped us in ways that maybe we will not even understand yet. But apart from enjoying the class room exercises and discussions; KPIs are an integral part of any financial analysis of a company, industry or past performance. They can identify a certain financial position of a company without going in to too much detail.

However, KPIs being useful for performance measurement; it is not unheard of them being deceptive as well as sometimes false. It is because of variations in the original financial statements.

Our group consisted of three students; Adeel Siddiqui, Madeeha Malik and Bilal Mustafa. We had never met each other, let alone take class together. Through this course and project, not only have we learned what credit agencies are, how TFCs are issued, how performance is measured and the features of all securities but we have also understood how we may have to tackle these issues in the real world.

Much more than being grateful to Mr. Kasim for teaching us things you may not find in books; we are respectful and salute his commitment to the cause. We can say this, we may not be analysts or financial managers yet but with the knowledge we have learned in this course; we are a few more steps closer to becoming just those.

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• To determine the benchmarks for judging performance of a company.

T h d di f l i f • To have an understanding of an analysis of a company, competitor and industry.

• Realizing why KPIs are important for an analysis.

• The following benchmarks have been used in the analysis of the Automobile and Parts Industry:

1 Compare data with Past Performance1. Compare data with Past Performance

2. Compare data with Industry Performance

3. Compare data with Nearest Competitors

4. Special Events

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Industry Overall 1.51 1.14 6.02

Al Ghazi Tractors 5.85 0.20 19.42

Atlas Battery 1.39 0.76 8.48

Atlas Honda 1.49 2.62 4.22

Exide Pakistan 1.23 1.53 4.90

Ghandhara Nissan 1.09 1.08 (5.14)

HinoPak Motors 1.23 2.23 (1.17)

Honda Atlas Cars 0.62 3.54 (6.23)

Indus Motors 1.67 1.16 8.72

Millat Tractors 1.42 1.67 16.18

Pak Suzuki 3.01 0.33 1.52

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Industry Overall 12.55 26.07 23.45

Al Ghazi Tractors 38.55 49.23 48.75

Atlas Battery 24.91 43.66 38.78

Atlas Honda 13.55 29.87 23.23

Exide Pakistan 12.29 28.49 27.36

Ghandhara Nissan (3.66) (7.45) (6.42)

HinoPak Motors (2.43) (7.01) (6.78)

Honda Atlas Cars (10.45) (41.14) (25.87)

Indus Motors 21.92 45.82 44.21

Millat Tractors 37.92 89.45 88.67

Pak Suzuki 3.52 4.51 4.51

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Industry Overall 9.54 66.73

Al Ghazi Tractors 44.46 148.20

Atlas Battery 26.52 102.24

Atlas Honda 13.10 71.56

Exide Pakistan 34.92 203.55

Ghandhara Nissan (3.52) 35.88

HinoPak Motors (11.94) 143.20

Honda Atlas Cars (7.87) 13.84

Indus Motors 43.81 160.15

Millat Tractors 88.17 155.95

Pak Suzuki 2.35 176.33

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ROE 10.49 29.87 2.90 4.51 20.74 45.82

ROA 8.43 23.30 2.30 3.50 11.88 21.92

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SALES GROWTH -43.50% 85.90% -45% 62.51% -23.00% 58.70%

ASSET GROWTH -15% 15.50% 4.10% 95% 50.50% 31.00%

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DEBT TO EQUITY 1.22 1.19 0.23 0.33 1.01 1.16

NET PROFIT MARGIN 2.57% 4.22% 1.57% 1.52% 5.40% 8.72%

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• The following key performance indicators have been graphically represented over the years to create charts for trend analysis:

1. Book-Value/Share (BVPS) and Earning Per Share (EPS) (EPS).

2. Sales, Total Assets and Net Profit growth trends.3. Current Ratio and Debt to Equity Ratio.4. Return on Equity (ROE) and Return on Assets

(ROA) trends. 5. Dividend Per Share (DPS).

• Refer to the Excel Sheet.

• Non current assets increased from 988887 to 3347025 from 2005 to 2010 with an average increase of 27.3587% per year

Fi d t i d d ti ll i 8 f • Fixed asset increased dramatically in 2008 from 2007 could be owing to the fact that the intangible assets have been amortised

• Trade debt also increased crazily in 2008 from 2007 more than doubling it

• Consistent build up in the general reserves

• Sales increasing on average 13% per year amounting to 60093139 in 2010

• Consistent gross profit margins meaning COSG is tackled very well by the managers

• Debt to equity ratio showing a downward trend that means the company is going equity more than debt as their means of financing

• Assets were utilized best during 07-08 afterward they were underutilized

• ROE and ROCE a whopping 75% in 2006 and declined in the years to come to a near 44 5% in 2010the years to come to a near 44.5% in 2010

• Dividend payout ratio is relatively consistent throughout the five years

• EPS is an astonishing 43.81 in 2010 which is amazing!!!!

advanced financial management - · pdf file04.04.2013 · advanced financial...

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