Motors: ATLAS HONDA LIMITED - Analyses of Financial Statements June 2002 to December 2006
SCANNER
OVERVIEW (August 29 2007): Atlas Honda Limited is a joint venture between the Atlas Group and Honda Motor Co, Japan. The company was created by the merger of Panjdarya Limited and Atlas Autos Ltd in 1988. Both these motorcycle manufacturing concerns were established by the Atlas Group.
Atlas Honda Limited manufactures and markets Honda motorcycles in collaboration with Honda Motor Company. The Company also manufactures various hi-tech components in-house in collaboration with leading parts manufacturers like Showa Atsumitech, Nippon Denso and Toyo Denso.
The company has undertaken to develop local manufacturing capabilities to the highest, economically feasible level. While a major role in localization has been assigned to vendor industries, Atlas has the country's largest in-house manufacturing capability in the country at its Karachi and Sheikhupura plants.
To support the production facilities, the company has established an R&D wing and tool making facilities, which are growing rapidly in size and function as the company expands. Atlas has managed to execute 12 Joint Venture and Technical Assistance Agreements between local vendors and foreign manufacturers for transfer of technology besides Atlas has directly executed nine Joint Venture and Technical Assistance Agreements other than with Honda.
Motorcycle Industry of Pakistan is fast reaching its peak level in terms of production. With around 43 OEMs in the industry, the production capacity stands at around 1.6 million units. As evident from the sales trend of the industry, production is rising rapidly and can be attributed to robust demand for the vehicle owing to increase in per capita income. With consistent GDP growth and per capita income, the production of motorcycles is anticipated to increase further.
Atlas Honda Limited is presently the market leader in the motorcycle industry with a total market share of 70% in terms of total sales.
Recent Results:
During the third quarter, the company's revenue was recorded at Rs 4.04 billion against Rs 4.25 billion of the last corresponding periods due to lower sales volume, 7.38 percent down to the corresponding period. The major reason for the slower off take has been the poor performance of the rural areas, with the disappointing performance of cash crops, and delay in cash flow from sugarcane and rice. The unusual rains also affected the urban sectors.
The gross margin, however, increased to 9.93% from 9.01%. The gross margin remained unaffected despite lower sales, unfavourable exchange rate and increasing cost of production because of cost rationalization activities and 93% localization boasted by the company.
Increase in borrowing in order to finance the capacity expansion and new projects led to the financial cost being Rs 76.14 million as compared to Rs 46.00 million in the third quarter. On account of growth in motorcycle market, Atlas Honda invested heavily on localization and capacity expansion, mainly the set up of the new factory in Sheikhupura which can assemble a motorcycle in 35 seconds.
The expansion was financed through long-term debt, the impact of which is seen in current liabilities and thus the current ratio of the company. Hence, the current ratio has been declining since 2-3 years. However, the CR is still above 1, depicting prudence on part of the company.
Some inherent weaknesses that Atlas Honda has to encounter are that of high cost of production mainly due to high cost of raw materials, high taxation, soaring utility costs, high interest rate and escalating oil prices. The company, however, has maintained its profitability figure at a consistently high position on account of high sales volume, benefits of localization (93%) and efficient fund management. Gross profit margin has shown a declining trend over the past 5 years on account of high base effect. The argument holds true for net profit margin as well.
Expansion projects have depressed ROA as well, showing company's temporary inefficiency in managing its plants, equipment and machinery. Forthcoming years will turn the tables in favour of the company on the back of high net profit margins through better asset utilization. Atlas Honda, nevertheless, has to further reinforce its efficiency to minimize its expenses.
Strong demand backed by robust economic growth assisted the company in rapid conversion of inventory into sales as indicated by inventory turnover (days). The operating cycle has also followed the same trend. TATO is however, declining which can be ascribed to rising assets due to expansion in plant and equipments. Better demand on the other hand, has driven up the sales/equity ratio.
All in all, the company's asset management ability is very strong. Atlas Honda has a lot of room for further diversification in the international market, which will bolster the asset management ability of the company to a greater extent.
Debt paying ability has consequently deteriorated on account of huge expansion plans mainly financed through long-term loans. As evident from the trend, debt-assets and long-term debt-equity have increased rapidly.
Far greater increase in the interest expense against high operating profit depressed the interest paying ability of the company as evident from TIE ratio and debt service ratio. Rising interest rate along with rising cost of production will further lower the debt paying ability of the company.
The number of outstanding shares has been continuously on the rise, and this is the main reason behind decreasing trend of EPS and DPS. However net income in absolute terms has surged over the years. Similarly, P/E ratio and BV per share have decreased since the increase in number of shares was greater than the increase in the total stockholder's equity.
With the abolishment of deletion policy that made the localization mandatory, situation has become more challenging for the company. This has also generated more competition in the industry. Barriers to entry are now much less than that in preceding years as a result of liberal import policy. Now entrants from all sorts of backgrounds and interests have started importing and assembling motorcycles. However, strong brand equity, better marketing and prudent management strategies will enable the company to retain its superiority.
Being the most competitive firm in the industry in terms of capacity and efficiency, Atlas Honda plans to diversify its export market. Now that the company has embarked on expansions, it is all set to diversify its portfolio along with contributing towards foreign exchange reserves of the country. Atlas Honda is now targeting at least 10% of its sales to come from exports.
However, with the prices of raw materials on a continuous rise and new competition coming up, the company need to bolster its position in terms of cost reduction to prevent erosion of its profit margins.
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ATLAS HONDA COMPANY LIMITED-KEY FINANCIAL DATA
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Income Statement (Rs'000) Jun'02 Jun'03 Jun'04 Jun'05 Jun'06 Dec'06
Total Revenue 5,523,951 6,977,439 9,948,094 14,120,847 17,420,263 7,995,116
Cost of Goods Sold 4,788,509 5,949,644 8,713,899 12,776,676 15,790,546 7,284,484
General & Administrative Expense 171,448 231,085 241,651 302,252 343,087 167,297
Selling and Distribution Expense 150,923 128,959 119,986 143,018 185,232 107,309
Operating Profit (EBIT) 413,071 667,751 872,558 898,901 1,101,398 436,026
Financial Charges 26,572 26,430 19,309 68,050 151,611 127,674
Net Income After Taxes 270,498 427,403 544,750 630,456 676,832 221,821
Balance Sheet (Rs'000) Jun'02 Jun'03 Jun'04 Jun'05 Jun'06 Dec'06
Stores & Spares 38,065 92,867 144,582 226,540 379,380 440,569
Stock in Trade 462,254 557,280 1,285,043 1,567,530 1,937,675 2,098,963
Cash & Bank Balances 406,881 1,021,226 227,094 1,432,363 682,088 462,272
Total Current Assets 1,273,237 2,075,370 2,691,557 4,165,911 3,974,218 4,480,621
Total Non Current Assets 558,418 581,754 1,420,381 1,925,417 3,655,946 3,696,986
Total Assets 1,831,655 2,657,124 4,111,938 6,091,328 7,630,164 11,874,593
Total Current Liabilities 925,333 1,408,220 2,060,603 2,883,558 3,011,449 3,591,514
Total Non Current Liabilities 114,055 172,292 558,882 1,129,537 2,009,786 1,969,928
Total Liabilities 1,039,388 1,580,512 2,619,485 4,013,095 5,021,235 5,561,442
Paid Up Capital 204,368 204,368 204,368 255,460 357,644 411,291
Total Equity 792,267 1,076,612 1,492,453 2,078,233 2,608,930 2,616,165
LIQUIDITY RATIO Jun'02 Jun'03 Jun'04 Jun'05 Jun'06 Dec'06
Current Ratio 1.38 1.47 1.31 1.44 1.32 1.25
ASSET MANAGEMENT Jun'02 Jun'03 Jun'04 Jun'05 Jun'06 Dec'06
Inventory Turnover (Days) 33.06 34.01 52.45 46.37 48.55 115.94
Day Sales Outstanding (Days) 10.84 2.56 2.54 3.56 5.80 14.36
Operating Cycle (Days) 43.90 36.57 55.00 49.94 54.34 130.30
Total Asset turnover 3.02 2.63 2.42 2.32 2.28 0.98
Sales/Equity 6.97 6.48 6.67 6.79 6.68 3.06
DEBT MANAGEMENT Jun'02 Jun'03 Jun'04 Jun'05 Jun'06 Dec'06
Debt to Asset (%) 56.75 59.48 63.70 65.88 65.81 68.01
Debt/Equity (Times) 1.31 1.47 1.76 1.93 1.92 2.13
Times Interest Earned (Times) 16.98 27.48 47.81 14.80 7.91 3.74
Long Term Debt to Equity (%) 14.40 16.00 37.45 54.35 77.03 75.30
PROFITABILITY (%) Jun'02 Jun'03 Jun'04 Jun'05 Jun'06 Dec'06
Gross Profit Margin 13.31% 14.73% 12.41% 9.52% 9.36% 8.89%
Net Profit Margin 4.90% 6.13% 5.48% 4.46% 3.89% 2.77%
Return on Asset 14.77% 16.09% 13.25% 10.35% 8.87% 2.71%
Return on Common Equity 34.14% 39.70% 36.50% 30.34% 25.94% 8.48%
PER SHARE Jun'02 Jun'03 Jun'04 Jun'05 Jun'06 Dec'06
Earning per share 13.24 20.91 26.66 24.68 18.92 5.39
Price earning ratio 3.03 3.23 2.63 2.31 3.73 10.58
Dividend per share 6.00 7.00 10.00 10.00 7.50 5.22
Book value 39 53 58 81 72.95 63.61
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COURTESY: Economics and Finance Department, Institute of Business Administration, Karachi.
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