honda atlas cars pakistan

Department of Commerce

The Financial Management’s Final Project on…!

Prepared by: Arsalan Ali Raja

Roll No: 23 – Regular

Submitted to: Prof. Zahid Ali Akbar

B.Com (HONS)

Vth Semester / Regular

Honda Atlas Cars Pakistan – Student’s Profile

Name: Arsalan Ali Raja

S/O: Tanveer Sani Raja

Roll No: 23 – Regular / 2008

Student ID: BCOF08M023

Date of Birth: Sept 8th / 1990

CGPA: 2.75 (EST)

Cell: 0334-5290549

E-mail: [email protected]

Semester: Vth – Regular

Program: B.Com (HONS)

Session: 2008 – 2012

Department: Commerce

Resident: Khwera – The City of Salt

mailto:[email protected]

The FM Project of Honda Atlas Cars Pakistan

Submitted By: Arslan Ali Raja 1

Honda Motor Company

Name: Honda Motor Company, Limited

Type: Public

Industry: Automotive & Aviation

Founded: 24th Sept, 1948

Founder: Soichiro Honda & Takeo Fujisawa

Headquarter: Minato, Tokyo, Japan

Area Served: Worldwide

Key People: Satoshi Aoki (Chairman)

Takanobu Ito (C.E.O.)

Products: Automobiles, Motorcycles, Scooters, ATV’s, Electrical Generators,

Water Pumps, Lawn & Garden Equipments, Tillers, Cutboard

Motors, Robotics, Jets, Jet Engines & Thin-film solar cells

Revenue: US $ 120.27 Billion

Operating Income: US $ 2.34 Billion

Net Income: US $ 1.39 Billion

Total Assets: US $ 124.98 Billion



Total Equity: US $ 40.6 Billion

Employees: 181,876 (@ Head Office)

Subsidiaries: Acura & Honda Aircraft Company

Honda Technology Research Institute Company, Limited listen is a Japanese

multinational corporation primarily known as a manufacturer of automobiles and

motorcycles.

Honda has been the world's largest motorcycle manufacturer since 1959, as

well as the world's largest manufacturer of internal combustion engines measured by

volume, producing more than 14 million internal combustion engines each year.

Honda surpassed Nissan in 2001 to become the second-largest Japanese automobile

manufacturer. As of August 2008, Honda surpassed Chrysler as the fourth largest

automobile manufacturer in the United States. Honda is the sixth largest automobile

manufacturer in the world.

Honda was the first Japanese automobile manufacturer to release a dedicated

luxury brand, Acura, in 1986. Aside from their core automobile and motorcycle

businesses, Honda also manufactures garden equipment, marine engines, personal

watercraft and power generators, amongst others. Since 1986, Honda has been

involved with artificial intelligence/robotics research and released their ASIMO robot

in 2000. They have also ventured into aerospace with the establishment of GE Honda

Aero Engines in 2004 and the Honda HA-420 Honda – Jet, scheduled to be released in

2011. Honda spends about 5% of its revenues into R&D.



Honda Atlas Cars Pakistan

Honda Atlas Cars Pakistan Limited (HCAR) is a joint

venture between Honda Motor Company Limited Japan,

and the Atlas Group of Companies, Pakistan. The company

was incorporated on November, 1992 and joint venture

agreement was signed on August, 1993. The ground

breaking ceremony was held on April 17, 1993 and within a

record time of 11 months, construction and erection of machinery was completed.

The first car rolled off the assembly line on May 26, 1994. Official inauguration was

done by President of Pakistan, Sardar Farooq Ahmad Khan Leghari. Mr. Kawamoto,

President of Honda Motor Company Limited Japan was also present to grace the

occasion. The company is listed on Karachi, Lahore and Islamabad Stock Exchanges.

On July 14, 1994, car bookings started at six dealerships in Karachi, Lahore,

and Islamabad. Since then the Dealerships Network has expanded and now the

company has sixteen 3S (Sales, Service and Spare Parts) and thirty 2S (Service and

Spare Parts) Pit stops network in all major cities of Pakistan.

Since the commencement of production in 1994, the company has produced

and sold more than 150,000 cars till Oct, 2008. All dealerships are constructed in

accordance with the standards defined by Honda World over. Percentage of local

parts conforms to the government's policy. Local vendors are continuously

patronized to develop parts locally. The quality of local parts is thoroughly checked

to meet stringent international standards. We always strive to give outstanding



service to our valued

customers. In addition to

providing regular service to

customers, the company also

regularly conducts Service

Campaigns, to facilitate

customer's need for service.

This has given our customers

absolute confidence in our cars, clearly evident from the ever increasing sale

volumes.

It is the constant endeavor of Honda Atlas Cars (Pakistan) Limited to achieve

No .1 Customer satisfaction. Honda Atlas Cars (Pakistan) Limited is committed to

meet customer expectations, and to provide good value for money . Currently we are

offering 8 different models of Honda CIVIC and CITY cars in wide range of colors with

unique technological and other features.

Vision Statement

Focusing on “satisfaction” (customers’,

associates’ and shareholders’) with challenging spirit

and flexibility, we are dedicated to supplying latest

generation cars with advanced technology, greater fuel

efficiency and competitive prices, along with friendly

and efficient after sales back up, maintaining “quality” as core of all activities.



Corporate Profiles

Honda Motor Co., Ltd. operates under the basic principles of "Respect for the

Individual" and "The Three Joys" — commonly expressed as The Joy of Buying, The

Joy of Selling and The Joy of Creating. "Respect for the

Individual" reflects our desire to respect the unique

character and ability of each individual person,

trusting each other as equal partners in order to do

our best in every situation. Based on this, "The Three

Joys" expresses our belief and desire that each person

working in, or coming into contact with our company,

directly or through or products, should share a sense

of joy through that experience.

In line with these basic principles, since its establishment in 1948, Honda has

remained on the leading edge by creating new value and providing products of the

highest quality at a reasonable price, for worldwide customer satisfaction.

The Company has grown to become the world's largest motorcycle

manufacturer and one of the leading automakers. With a global network of 507*

subsidiaries and affiliates accounted for under the equity method, Honda develops,

manufactures and markets a wide variety of products, ranging from small general-

purpose engines and scooters to specialty sports cars, to earn the Company an

outstanding reputation from customers worldwide.



HCAR’s Innovation Point of View

"Do Not Imitate" the mandate of Soichiro Honda echoes in the minds

and hearts of everyone at Honda. At Honda,

we are constantly challenging ourselves to seek

out new initiatives and stay at the forefront of

innovation.

As an organization dedicated to the

advancement of mobility, we have always

targeted leading-edge technologies. From our

racing spirit and our commitment to "Safety for

Everyone," to our dedication to environmental

leadership and the advanced potential of ASIMO, it is our mission to develop

forward-thinking technologies that anticipate and satisfy the needs of people in the

future.

HCAR’s Safety Point of View

We believe you deserve advanced levels of safety regardless of the price or

size of the vehicle that meets your needs. Through technology and innovation, we

are developing increased levels of protection for the driver and all passengers in

Honda vehicles. At the same time, we are making an active commitment to enhance

safety for the occupants of other vehicles and even pedestrians.

http://www.honda.com.pk/asimo/index.html



Honda has a long record of industry leadership in the development and application

of advanced safety technology. Honda R&D safety research activities in Japan and

the U.S. are playing a critical role in the further development of Honda safety

technology and the evolution of Honda's "Safety

for Everyone" concept.

"Safety for Everyone" is a comprehensive

approach to vehicle safety that seeks to provide a

high-level occupant protection for all Honda

vehicles, regardless of size or price, along with

increased compatibility with other vehicles and

improved safety for pedestrians. As a leader,

Honda looks beyond government regulations, studying real world situations to

develop new safety technologies.

HCAR’s Motor Sports Point of View

For almost 50 years, Honda has

turned to racing as the perfect training

ground for both engineers and designers.

According to Soichiro Honda, the pressures of racing challenges people, forces them

to find innovative solutions and demands quick, accurate responses to new problems

they've never faced before.

Racing is ingrained in the corporate culture of Honda. Mr. Honda always

stressed that racing teaches teamwork. No single individual can bring success; racing

is a group effort.

http://www.honda.com.pk/tech/index.html



Throughout its existence, on both two wheels and four, Honda has raced—

and won—at the highest levels. From the Isle of Man TT motorcycle race to Formula

One Grand Prix (with 60 race victories and four consecutive Constructors'

Championships from 1988–91), Honda models are found in victory lanes around the

world.

HCAR’s Environmental Consciousness

Honda has always targeted mass-market models in order to have the greatest

impact on clean air and fuel economy. To this end, we work to improve existing

technologies while using The Power of Dreams philosophy to envision and develop

the vehicles of the future.

Environment Policy

Honda Atlas Cars (Pakistan) Limited, being responsible member of society

considers the preservation of the global environment as a crucial concern.

Our environmental philosophy is firmly based on the following principles:

Recognize the impacts of our activities, products and services on environment.

Formulate objectives and targets for pollution prevention, environmental impacts mitigation and

resource conservation as far as technically feasible.

Operate in compliance with applicable legal and other requirements with the commitment to

preserve global environment

Create awareness and understanding about environmental issues amongst our associates.

Commitment to continual improvement of the environmental performance and review of the

environmental management system to ensure its suitability, adequacy and effectiveness.

Keep public and other interested parties informed on our environmental performance, if deemed

necessary.



HCAR’s Products Line – Up

Following are the major products lines which are present in Paksitan as:

1) Honda Accord

2) Honda CR – V

3) Honda Civic

4) Honda City

Honda Accord – Witness the debut of the astonishing new Honda Accord: the

outcome of our all-out pursuit of sedan excellence, successfully uniting all

contradictory elements. A bold exterior presence with a luxury air yet a sporty

youthful feeling. An expansive upper-class cabin with comfortable travel space for

five adults and panoramic visibility. A larger body with

sportier performance than ever before and powerful i-

VTEC engines designed for high fuel economy. A renowned

global car with all advanced Honda technologies for driving

command, plus eco-performance for increased

recyclability. And Honda's world-leading safety protection, which even extends to

pedestrians and those in other vehicles. Experience its overall quality, riding comfort,

and details for yourself, and you'll know why the new Accord represents a distinct

"status upgrade" for the sedan.

http://www.honda.com.pk/accord/index.html



Honda CR – V – Dynamic styling appeal. Elevated

SUV outlook, premium driving refinement. And an

exhilarating yet stable feeling. The new Honda CR-V

has all you want, and more. A spacious cabin and

utilities, due to packaging innovation. Plus superb I – VTEC response, quietness, and

safety. Discover delightful CR-V driving. Now, all roads are exciting.

Honda Civic – What moves you? What drives you? What excites you? Honda seeks

the pinnacle of technology in pursuit of answers. Now, we present a bold way to stir

the body and soul, designed to quicken the pulse at first

glimpse, and stimulate the senses with each and every

encounter. The sporty new Honda Civic possesses rare

spirit, and so do you. See, touch, feel, drive and discover.

Honda City – See it coming, like an arrow. Striking good looks, cutting-edge design,

sharply focused tension. See it shoot straight ahead. What is it? Discover the

compact sedan breakthrough with strength to open a

new era and outlast fleeting trends. Sleek styling and

strong performance, with swift, gutsy response to the

driver's pedal action. Class-leading* spaciousness and

relaxing ride for outstanding comfort. Imagine the pride of driving and owning this

distinctive new-generation standard. Get ahead in the new City. People will be

watching.

http://www.honda.com.pk/cr-v/index.html

http://www.honda.com.pk/civic/index.html

http://www.honda.com.pk/city/index.html



HCAR – As Automobile Industry

The current economic recession has hit the world economy generally and

automobile industry particularly, with some of

the world renowned companies facing

hardships. However, Honda Motor Company is

among the few automakers with positive

bottom line of 162 billion Yen in the year

ending March 2009.

The automobile industry depends on

economic uplift, availability of auto financing at

favorable terms and sustainable consistent

industry friendly policies. In the recent past,

with the help of these factors, the automobile

production surged four times from 39,167 units in the year 2002 to 164,340 units in

2007. Responding to the increasing demand and the government target to produce

500,000 units by the year 2011, all OEMs expanded their production capacity to

meet the target set by the Government. However, following the emergence of

financial crises in early 2008 and increase in interest rates, the financial institutions

tightened the auto financing policy, which coupled with the upward surge in

exchange rates have pulled the auto sector down to four years ago i.e. 2004-2005

level.



In addition to above, the auto industry had to face the challenges of un-

favorable 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. In addition,

35% cash margin on imports was also levied, though reversed later.

Following the inflationary and exchange rates impact, the prices of all vehicles

were increased during the year, which contracted the demand of locally

manufactured vehicles. However, unlike the previous years, 21.7% decline was

witnessed in the category of 1300cc & above and in the category of 1000cc; it was

50.5% over the corresponding period last year. In the category up to 1000cc the

decline was 32.3% and 43.7% in Dec-08 and Mar-09 quarters respectively. Other

sectors of auto industry also witnessed decline. Motorcycles production was reduced

by 19.1%, LCV, Buses & Trucks were down by 25.6% whereas production of tractors

was marginally improved by 0.7% over same period last year.



Market Share of Honda

Honda Atlas Cars Pakistan had a market share of 11% in 2009, following Pak

Suzuki (market share: 52%) and Indus Motors (market share: 35%), the two leading

car manufacturers in Pakistan. The market share of Pak Suzuki declined to 52% in

2009 from 62% in 2008. Dewan Motor's market share also decreased from 5% in

2008 to just 2% in 2009. However, Indus

Motors and Honda Atlas gained in terms of

market share. The market share of Indus

Motors improved from 26% in 08 to 35% in

09.

Honda Atlas' market share surged

from 7% in FY08 to 11% in FY09. Sales of

both Pak Suzuki and Dewan Motors plunged

considerably by 56% and 75% respectively.

Indus Motors and Honda Atlas also

registered lower sales 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.



Financial Results of Honda Atlas Cars Pakistan

The net sales for the year were Rs

14,149.6 million against Rs 14,715.5 million of

last year. The administrative and selling

expenses were Rs 329.8 million against Rs 348.8

million in the same period of last year. Other

income improved to Rs. 64.8 million against Rs

23.6 million of last year, mainly due to increasing interest rates on bank deposits.

Other operating expenses increased to Rs. 311.0 million as compared to Rs. 4.9

million last year, mainly because of Exchange loss (Rs 231 million) and write-off (Rs

80 million) of Plant & Machinery items of old model of Honda City.

During the year, the company had to resort to bank borrowing to finance

capital expenditure of new City and pressure on working capital requirement, thus

financial cost was Rs 222.8 million for the

year against Rs 233.7 million of last year.

The company, therefore, suffered a loss

before tax of Rs 622.3 million against

profit of Rs 63.6 million in the last year.

The company is focusing on cost effective

measures to reduce the running cost of

business and to improve sales.



Financial Highlights

Mar-09 Mar-08 Mar-07 Mar-06

PROFIT AND LOSS ACCOUNT

Sales 14,150 14,715 17,055 25,639

Gross Profit 177 627 173 1,168

Operating (Loss) / Profit (400) 297 (189) 898

(Loss) / Profit Before Tax (622) 64 (482) 1,134

(Loss) / Profit After Tax (402) 75 (265) 705

Dividend Amount - - - 294

BALANCE SHEET

Share Capital 1,428 1,428 714 420

Reserves 1,400 1,802 1,727 2,285

Shareholders’ Equity 2,828 3,230 2,441 2,705

Capital Expenditure 2,209 188 2,521 1,833

Fixed Assets - At Cost 7,783 5,979 5,832 3,535

Fixed Assets – Net 5,406 4,010 4,341 2,359

Non Current Liabilities 1,500 500 1,958 672

Total Assets 9,942 6,817 8,305 9,174

Working Capital (1,685) (652) (225) 476

Capital Employed 4,328 3,730 4,399 3,377

SIGNIFICANT RATIOS

Profitability

Gross Profit Margin % 1.2 4.3 1.0 4.6

Operating (Loss)/Profit Margin % (2.8) 2.0 (1.1) 3.5

(Loss)/Profit Before Tax % (4.4) 0.4 (2.8) 4.4

(Loss)/Profit After Tax % (2.8) 0.5 (1.6) 2.8



Liquidity

Current Ratio Times 0.7 0.8 0.9 1.1

Quick Ratio Times 0.2 0.2 0.2 0.4

Long Term Debt to Equity Times 0.5 0.2 0.8 0.2

Total Liabilities to Equity Times 3.5 2.1 3.4 3.4

Activity

Total Assets Turnover Times 1.4 2.2 2.1 2.8

Fixed Assets Turnover Times 2.6 3.7 3.9 10.9

Stock Turnover Times 6.1 6.5 4.9 6.7

Interest Cover (BT) Times (1.8) 1.3 (0.6) 25.5

Interest Cover (AT) Times (0.8) 1.3 0.1 16.2

Number of Days Stock Days 59.6 55.9 74.3 54.7

Earning

Return on Capital Employed % (10.0) 1.8 (6.8) 26.2

Return on Equity (BT) % (20.5) 2.2 (18.7) 48.2

Return on Equity (AT) % (13.3) 2.6 (10.3) 30.0

(Loss) / Earning per Share (BT) Rs (4.4) 0.5 (3.8) 27.0

(Loss) / Earning per Share (AT) Rs (2.8) 0.6 (2.1) 16.8

Price Earning Ratio (AT) Times (4.4) 79.3 27.8 6.7

Dividend per Ordinary Share Rs - - - 7.0

Dividend Pay out Ratio % - - - 41.7

OTHER INFORMATION

Break up Value Per Share Rs 20 23 34 64

Market Value Per Share Rs 12 44 58 112

Contribution to National Exchequer Rs in M 6,452 4,958 6,213 8,481

Units Produced Units 12,780 15,080 18,240 31,476

Units Sold Units 12,502 15,604 18,709 30,719

Manpower No’s 955 946 1,034 1,198



Financial Analysis – Business Recorder’s

Point of View

Honda Atlas registered a positive growth in vehicle sales as the company

accomplished to sell 27% more vehicles as opposed to the 28% drop it witnessed in

the preceding year.

Major players like Indus Motors and

Pak Suzuki also showed impressive growth in

sales by 49% and 41% respectively. The

market share of Honda Atlas however has

shrunk to 10% as compared to 11% in 2009.

Indus Motors market share increased from

35% to 37% from 2009-10 on the back of

strong Toyota Corolla demand and sales, Pak Suzuki is steadfast at 52% while Dewan

Motors dropped from 2% to 1% due to weak sales of their popular pick-up Shehzore.

The performance of the car assemblers remained lackluster during FY09

owing to the economic meltdown in the country. However what is interesting to

note that although all the same factors which were present in FY09 are still

prominent in FY10, the sales of the car segment overall took a considerable leap

from selling a total of 82,844 cars during Jul 08-Jun 09 to 123,957 cars during Jul 09-

Jun 10, a whopping 50% increase.



Much of the factors which are continuously pounding the sustainability and

improvement in automotive sector are the severe depreciation of PKR against the

yen and US dollar. Since March 2007 the rupee has depreciated a staggering 38%

against the dollar and 73% against the yen.

Recent Financial Results

The world economy has started to show recovery from recession and so has

the Pakistani economy. The GDP growth for the fiscal year2009-10 improved to 4.1%

as against 2.50% of last year, mainly due to industrial growth and robust

performance of the service sector. The inflation was almost half, at 11.7% for the

year ended June 2010. The large scale manufacturing sector (LSM sector) showed

improvement of 4.4% mainly due to increase in production of cement, fertilizers and

auto sectors. The agriculture growth remained less than targeted at around 2%. The

service sector followed the growth of the manufacturing sector and registered a

growth of 4.6%.

The automobile industry gained the growth momentum in the fiscal year

ended June 2009-10 and registered a healthy growth of 49.6% over the same fiscal

year of 2008-09. The increase was made possible due to better economic conditions

and re-entry of commercial banks in consumer financing, which helped strengthen

the demand for consumer goods, despite rising cost pressures.

The total industry production for the year July 2009 to June 2010 was 121,647

units as against 84,308 units in 2008-09, up 44.3%. The sales were also increased to

123,957 units against 82,844 units, up 49.6%.



The production and sales of Honda Atlas increased accordingly and 3,960

units were produced and 4,319 units were sold during the first quarter ended June

30, 2010, up by 62.3% and 72.3% respectively over the same corresponding period

last year. The growth was evident despite the cost pressures built due to high

inflation and depreciating Pak rupee against US dollar and Japanese yen. It led to

increase in car prices a couple of times during the last fiscal year.

In the fiscal budget of 2010-11, the government raised the sales tax from 16%

to 17%, amid the controversy of Value Added Tax (VAT). The import of the additional

sales tax was passed on to the consumers and prices of all models were adjusted

upward from July 2010.

Honda’s Performance

The company s efforts to reduce the

operational loss and increase efficiency and cost

effectiveness paid dividends in the first quarter

ended June 2010. The sales increased by 74.9%.

The operational expenses and financial and other

charges were reduced substantially from Rs 229.4

million in Q1 of last year to Rs 164.8 million in Q1 of 2010, down 28.2% owing to

better cost control measures and cash flow management. The loss before tax was

reduced from Rs 249.5 million to Rs 60.1 million in the first quarter ended June 30,

2010.



The gross sales for the first quarter were improved to Rs 5,637.2 million

against Rs 3,223.9 million in the same quarter of last year. The cost of sales was Rs

5,551.10 million against Rs 3,253 million. The company earned a gross profit of Rs

86.10 million against a gross loss of Rs 29.6 million in the 1Q of last year. Other

income improved to Rs 18.6 million against Rs 9.5 million, up by 95.5%. The financial

charges were reduced substantially from Rs 159.2 million in 1Q of last year to Rs 39.8

million in the quarter under review, mainly due to repayment of short term running

finances and reduction in long term loans from Rs 1.5 billion on June 30, 2010.

Deferred payment facility from associated company of Honda Motor, Japan is

contributing towards improvement of cash flow of the company.

Sales were Rs 3223 million in the first quarter of 2009 and they were higher at

Rs 5637 million in the first quarter of 2010. Cost of sales was Rs 3253 million in the

first quarter of 2009 and they too were higher at Rs 5551 million at the end of the

first quarter of 2010.

Honda Atlas made a gross loss of Rs 29 million at the end of the first quarter

of 2009 and by the end of the first quarter of 2010, Atlas Honda had recorded a gross

profit of Rs 86 million. Honda Atlas made a loss after taxation of Rs 11 million at the

end of the first quarter of 2010 but it had recorded a much higher loss after tax of Rs

155 million.

Furthermore, Honda Atlas Loss Per Share stood at Rs 0.71 by the end of the

first quarter of 2010 whereas the Loss per Share had stood at Rs 1.09 at the end of

the first quarter of 2009.



Added to this currency pressure is the rising cost of electricity (34%), gas price

(13%), domestic gas price (25%) and international steel price which has increased

(77%). During the year, the company had to absorb depreciation cost of Rs 756

million, financial charge of Rs 455 million and exchange loss of Rs 56 million on

deferred foreign payables as well.

The company produced 5,648 units of Honda Civic during Jul-Jun FY10 and

sold 5,908 units as against 4,985 units during Jul-Jun FY09 and sales of 4,662. The

same trend can also be witnessed with their Honda City, where their sales has

outpaced their production (2009 production: 6,755 - Sale: 6,482) and (2010

production: 7,852 - Sale: 8,212) bringing the total sales up for Honda Civic and Honda

City by 27% and 26% respectively.

Honda’s Profitability

The company posted sales revenue of Rs

15. 854bn during FY10 as compared Rs 14.149

billion during FY09. This increase in sales

revenue was backed by strong demand of both

mainstream products, Civic and City where up

to a 27% increase in sales was registered till June 2010. Although sales revenue has

shown a 12% increase, the cost of sales have shot up by 15% resulting in a gross loss

of (PKR 239,545m), a 236% decline from FY09.



The company managed to curtail its administrative, operating and

selling/marketing expenses which has significantly helped in cutting the general and

operating expenses but has remained dismal as the loss from operations has further

increased by 33% to PKR -532m from PKR -399m.

HCAR s finance costs for the period was twice as high from FY09 levels (2010:

455,128m -2009: 222,769m) which was incurred due to mark-up on short-term loans

taken by the company. Honda Atlas has posted a loss after tax of PKR 852,200

million in FY10 as compared to a loss after tax of PKR 401,833 million in FY09.

Much of the external cost pressures were offset by internal cost-cutting

activities, but the impact of inflation, uncertain exchange rates and domestic car

prices have left the company strangled with excessively high cost of sales and a

decline in operating income.



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 FY07.

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 of the company is

continuing to take hammering ever since FY09 and ending with colossal losses in

FY10.

Honda’s 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 was further pressed downwards. However,

the continued decrease in Liquidity is attributed to a 10% decrease in current assets

and 1% increase in current liabilities which are further driving the key ratio down.



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.

Honda’s Debt Management Ratio

The total liabilities of the company decreased a mere 1%. Long term financing

also declined by 11% bringing the total liabilities of FY10 to PKR 6.985bn from PKR 7.

114bn. Also, the TIE ratio improved in 2008 indicating that it has became easier for

the company to make its future payments but was not strong enough to sustain the

same rate. A continuous drop is being witness in the past two years where TIE has

been calculated at -1.79 and -1.17 for FY09 and FY10 respectively due to increasing

financing charges and decreasing operating profit.

Honda’s Asset Management Ratio

The company

follows a policy of

managing its assets in a

consistent manner. Its

inventory turnover

decreased depicting that it

took shorter for the

company to sell its stock in trade. It took the company 55 days to sell its inventory in

FY10 as against 79 days in FY09. The total asset turnover ratio has shown some

improvement, FY09 figure stood at 1.42 whereas FY10 stands at 1.77.



The operating cycle in 2010 was same as it was in 2009, 84.48 and 83.22

respectively. This may be attributed to the unusual increase in demand from the

consumer end backed by guaranteed payments. The collection period although has

not decreased but strong sales and high production of cars at Honda Atlas may

indicate that the figures aren’t worrying the company. The inventory turnover ratio

was also approximately the same as that of last year.

Honda’s Market Value

The market value of the company has continued to erode on the back of

decreasing profits and high cost of sales. The price per share in 2007 was Rs 58,

which continued to plummet from being Rs 44 in FY08, Rs 12 in FY09 and finally rose

a little to Rs 16 in FY10.

Honda’s 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. Added with the levy of 15% on

import of high tech part in the automobile sector has also aggravated the situation

by adding additional pressure on cost of goods. Already depreciated rupee vs dollar,

inflation and import duty on parts will most likely lead to a rise in price for most car

manufacturers alike.



However, world economies are moving in the right direction and so is

Pakistan, but what is crucial to the automobile industry are long-term supportive

policies. The trade deficit is beginning to show positive movement as the

government has taken action on unnecessary import items.

The focus is thus in company

productivity of the manpower and

machinery to help reduce non-

material based cost pressures. For

this the company has successfully

optimized inventory and process

improvements. Honda Atlas

continues to restate their strengths

initiating in-house cost cutting measures and focusing on quality, cost, innovation

and better after sales service.

The company has now expanded the after sales service network and its

warranty network to over 150 dealerships. In order to project the company s

community activities safety riding activity has emerged as a full fledged function,

which is imparting technical skills to motorcycle riders in the private sector as well as

in the government sector by partnering with the police and Rangers to educate

users.



Financial Analysis – Firms Official’s

Point of View

Liquidity Ratios

2007 2008 2009

Current Ratio: 0.94 0.80 0.70

Quick Ratio: 0.23 0.24 0.15

Its current ratio has been less than one for three years which shows that its

current liabilities are greater than its current assets. Although its current assets

increased by 61% in Financial Year 2009 but its current liabilities also increased by

82% so current ratio further decreased.

Apparently it looks that its

liquidity position is very weak but

actually it is not true because of the

nature of its current liabilities. In its

current liabilities one main portion is its

trade payables, as it purchases its raw

material from parent company Honda Japan so it can get a lot of relaxation in making

payment to its parent company.



In its current liabilities one portion consist of advances from dealers which are

not likely to demand all of their money in near future. So if we consider these factors

then its liquidity position looks better even with low quick and current ratios. It has

to pay its payables in Japanese Yens so change in currency rate can affect the figure

of payables so a risk is also involved.

Its quick ratio is very low as most of the current assets consist of inventory,

other assets like receivables and cash are very low. Its receivables are very low or are

nil as it makes sales on cash even gets money in advance which further increases its

current liabilities. Its cash position is very low as it did its expansion in plant capacity

in 2007 and lot cash was used there.

Asset Management Ratios

2007 2008 2009

Inventory Turnover (Days) 58.50 43.33 78.73

Total Asset turnover 2.05 2.16 1.42

I have not calculated its receivable turnover as I have explained that it either

does not has its receivables or they are very low. Its inventory turnover increased

showing that it took longer for the company to sell its stock in trade. It has increased

from 43 to 79. Its basic reason is decrease in over all demand of cars due to bad

financing condition.



The company has to make big batches of each model to reduce set up cost

but this over production takes time in selling as demand has decreased due to due to

high interest rates.

The total asset turnover ratio has decreased showing that the assets are not

being used efficiently as it has been discussed that capacity is much higher than

production and sales.

Debt Management Ratios

2007 2008 2009

Debt/Equity (Times) 2.40 1.11 2.52

Times Interest Earned (Times) -0.58 1.27 -1.79

The total liabilities of the company have almost doubled during 2009. Its

major reason is that it long term debt has doubled. Negative TIE ratio is due to loss in

2007 and 2009. Long term debt is paid through profit which Honda is not generating

but still this loss does not show very weak position as major expense is depreciation

expense which is converting profit into loss and we know that the company does not

has to pay this expense. It is a non cash expense. If we exclude this expense then

company can show some better debt position. But overall position is not so good as

demand of cars has decreased in last three years.



Profitability Ratios

2007 2008 2009

Net Profit Margin -1.55 0.51 -2.84

Return on Asset -3.19 1.10 -4.04

Return on Equity -10.84 2.32 -14.21

Earning Per Share -3.71 0.55 -2.81

As the company is in loss therefore all profitability ratios are negative.

Actually in this type of business big fixed cost is involved which can only be recovered

if production is done at large scale but due to low demand it is very difficult to

recover and which converts the contribution generated from sale into loss.

Although it looks that its shareholders are in loss but that is not the reality its

parent company sells parts to it and earns profit on this sale so even if Honda Atlas is

in loss still parent company is earning profit. ROA went down because of the dual

reason of decreasing returns and increase in asset size. The asset base of the

company widened during 2007 due to capacity expansion and introduction of new

models because there was increasing trend of demand when this expansion was

started.



The company was able to keep its cost of sales in a bit low during 2009. The

cost of sales in 2009 due to restricted production of cars and cost minimization.

However, lower costs could not restrict the impact of lower sales revenue on the

profitability of the company.

HCAR’s Current Scenario

The performance of the car assemblers remained lackluster during FY09

owing to the economic meltdown in the country. In the wake of rising steel prices,

appreciation of yen against rupee and imposition of 5% FED in the budget of FY09,

the car assemblers passed on the increase in cost to the consumers. The increase in

car prices weakened the demand for cars.

Also, high interest rates and reduction in car financing facility offered by

banks further depressed the demand for 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 rationalized its car production inline

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.



Common – Size Analysis

2006 2007 2008 2009 2010

Income Statements

(Rs. In 000)

Total Revenues

100 100 100 100 100

Cost of Goods Sold

95.446 99.414 95.736 98.753 101.511

General & Admin Expenses

0.585 1.260 0.946 0.988 0.859

Selling & Distribution

Expenses 0.525 0.864 1.425 1.343 0.788

Operating Profit (EBIT)

3.444 (1.538) 2.020 (2.824) (3.361)

Financial Charges

0.181 1.791 1.588 1.574 2.871

Net Income before Taxes

4.422 (2.824) 0.432 (4.398) (6.232)

Net Income after Taxes

2.751 (1.551) 0.510 (2.840) 5.375

2006 2007 2008 2009 2010

Balance Sheet

(Rs. In 000)

Shares & Spares

2.504 0.606 1.219 1.025 1.354

Stock in Trade

45.444 32.570 23.658 29.713 25.991

Cash & Bank Balances

3.931 2.647 3.402 0.206 0.916

Total Current Assets

68.342 44.325 35.729 39.526 39.356

Total Non-Current Assets

31.658 55.675 64.271 60.474 60.644

Total Assets

100 100 100 100 100

Total Current Liabilities

63.187 47.033 45.287 56.469 63.075

Total Non-Current Liabilities

7.326 23.580 7.335 15.087 14.879

Total Liabilities

70.513 70.612 52.621 71.557 77.954

Paid - Up Capital

7.783 8.597 20.948 14.363 15.935

Total Equity

29.487 29.388 47.379 28.443 22.046



Index Analysis

2006 2007 2008 2009 2010

Income Statements

(Rs. In 000)

Total Revenues

100 66.521 57.396 55.189 61.837

Cost of Goods Sold

100 69.286 57.570 57.100 65.766

General & Admin Expenses

100 143.377 92.851 93.242 90.828

Selling & Distribution

Expenses 100 109.483 155.873 141.310 92.862

Operating Profit (EBIT)

100 (29.694) 33.661 (45.239) (60.338)

Financial Charges

100 659.011 504.036 480.561 981.810

Net Income before Taxes

100 (42.485) (50.611) (54.890) 87.146

Net Income after Taxes

100 (37.508) 10.635 (56.974) 120.829

2006 2007 2008 2009 2010

Balance Sheet

(Rs. In 000)

Shares & Spares

100 169.209 279.463 342.824 408.152

Stock in Trade

100 64.881 38.682 70.856 55.867

Cash & Bank Balances

100 60.967 64.301 5.681 22.751

Total Current Assets

100 58.712 38.845 62.676 56.250

Total Non-Current Assets

100 73.747 150.850 207.011 187.114

Total Assets

100 90.526 74.303 108.369 97.678

Total Current Liabilities

100 67.382 53.253 96.848 97.504

Total Non-Current Liabilities

100 291.378 74.394 223.183 198.385

Total Liabilities

100 90.654 55.450 109.973 107.985

Paid - Up Capital

100 100.000 200.000 200.000 200.000

Total Equity

100 90.221 119.387 104.533 73.031



Future Outlook – General

Point of View

With the continuation of the current policies, current business environment is likely

to improve,in addition to the increased external assistance from IMF, further

economic consolidation is likely in the near future. The foreign exchange reserves are

expected to continue to build-up on the back of imports contraction and stable

growth in remittances.



The positive indicators i.e. decreasing inflation and interest rates, stable exchange

rates and performance of agriculture sector etc. suggest that economy on the whole

is going to show stable performance soon. The oil and material prices are going down

in the international market, which further, would have positive impact on the

economy.The automobile industry is going through the testing times and needs

immediate policy reforms. The auto industry is considered to be the mother of all

industries. When it flourishes, it leads to the growth in other ancillary industries as

well. Our government should review the adverse measures taken in the previous

budgets, such as imposition of 5% Federal excise duty (FED), 1% increase in sales tax

and additional with-holding tax of 5% at the time of registration of car. The auto

industry needs long term, consistent and stable investment - friendly policy to help

achieve the set target of 500,000 units.



References

www.honda.com.pk

Business Recorder (www.brecorder.com)

IGI Securities Ltd.

www.google.com.pk

Thanks to all my Friends who help me...!

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End

http://www.honda.com.pk/

http://www.brecorder.com/

http://www.google.com.pk/

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