Car assemblers ignoring shareholders’ interests
By Asfa Naz
Three of the four listed car assemblers in Pakistan seem to be unmindful of the minority shareholders’ interests, and are adopting an extremely conservative stance that is hurting their return on capital (read equity). Had they been a little more considerate, they would have tried to make the best of current circumstances (strongly positive) to enhance returns for their shareholders. It lends a lot of support to the argument that listed companies’ management in Pakistan do not measure their success through the price-earnings multiples their shares are trading at.
For the students of economics and finance, companies are supposed to build shareholders’ value of investment by adopting an aggressive stance when the going is good and is likely to be good for quite sometime to come. When companies think that the business circumstances are getting tough, and the situation is not likely to reverse in the foreseeable future, the only thing they can do is preserve shareholders’ investment value by shedding risk as much as possible.
A very perfunctory peek at the latest balance sheets of three (Indus, Honda Atlas and Pak Suzuki) of the four (fourth one is Dewan Farooque) car assemblers will reveal that there is hardly any risk these companies have taken. Pak Suzuki does not even have a website like the three others, and of course why should there be any, when their cars are selling like hotcakes? Pak Suzuki’s balance sheet carries the lowest risk amongst car assemblers, and no wonder why its share is trading at the lowest PE ratio amongst its peers. Let us analyze the balance sheet risk of these four companies by looking at the figures they have produced.
Indus Motors
According to the accounts for the quarter ending on September 30, 2005, the company was almost debt-free, as there is only Rs.30.5m outstanding towards finance lease obligations, out of the total balance sheet footing of Rs.18.5bn. Out of this Rs.30.5m, Rs.20m is going to be paid off in an year’s time. On the current liabilities side, advances from customers and dealers standing at Rs.10.9bn are 78% of total current liabilities of Rs.14bn. This is not only a huge interest free loan, which is actually not needed, but also a tool with which the company can raise its unit sales if the business environment deteriorates. If this Rs.10.9bn is excluded, equity was as high as 60 per cent of the total balance sheet footing on September 30, 2005. These observations show that Indus Motors’ funding structure is almost risk free, and the minority shareholders have a reason to frown on them.
On the assets side, total fixed assets stood at Rs.1.34bn, which is a mere 7.6 per cent of balance sheet footing, and long term investment is almost zilch. Total cash and bank balance stood at a hefty Rs.12.2bn, which is 70 per cent of total balance sheet size, and 71 per cent of total current assets - such large is the cash holding and such small is the difference between their total assets and total current assets. It shows they are avoiding any kind of risk whatsoever, not even interest rate risk, as if they were not happy with the environment in spite of car sales boom in the country. So if they are not happy now, what will happen when this sales growth momentum will fade out, march out of the business?
Honda Atlas cars
The situation is not much different, except that the company ploughed Rs.1.1bn in long-term investments as at September 30, 2005. Despite having Rs.1.6bn in cash and bank balance, the current ratio stood close to 1.00, which means the business could easily be done with a much lower current ratio. Other asset and liability structure features are the same as that of Indus. This means Honda Atlas is also carrying a very low risk balance sheet, and not making a good use of car sales boom in the country.
Pak Suzuki Motors
This company is also maintaining a very low risk profile, in fact lower than even Honda Atlas and Indus. The dividend payout ratio of this company is the lowest amongst listed car assemblers in Pakistan. According to an Analyst of AKD Securities, cashflow from operating activities of this company is likely to be Rs.3.9bn in the year ending on December 31, 2005, and after a paltry outflow of Rs.1.6bn in investing activities, and a miserly Rs.146m towards dividend payment, the cash reserves of the company will rise by another Rs.960m to become Rs.6.7bn. One wonders why they are maintaining such huge cash reserves, when their expansion plans are so puny, and this goes for all Japanese car assemblers.
Dr. Ashfaq Hassan would be well meaning, if he were to ask all Japanese car assemblers in Pakistan about their lack of interest in buying Pakistan Investment Bonds from their huge cash reserves of more than Rs.20bn. Because these car assemblers are extremely risk-averse, they will most likely reply that they cannot convert this cash to long-term investment because the source of this cash is short term in nature.
Dewan Farooque Motors
They are an example of the other extreme, as they are struggling because of higher investment in fixed assets and non-liquid current assets, while 43 per cent of the total assets are financed by interest bearing debt, which seems a little excessive, but is typical of Dewan Mushtaq Group companies who love to take risk.
In conclusion, it is suggested that Indus Motors, Honda Atlas and Pak Suzuki need not worry so much about their business prospects, because advance payment from their customers is a big weapon they can use to defend against any (highly unlikely) deceleration in sales growth. Maybe they should induct younger people in their Board of Directors and senior management, who would like to show their loyalty to minority shareholders by replacing some equity (by paying higher cash dividends) with interest bearing debt/TFC’s, and investing more in high-risk-high-yielding assets.
source The News