Research and Analysis Project: Honda Atlas Cars (Pak) LTD

Research and Analysis Project
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Honda Atlas Cars [Pak] Ltd

2
Project Objectives and Research Approach:

The topic I selected for my BSc RAP is The Business and Financial
Performance of an Organization over a three year period.
Reasons for choosing the Topic:

For any organization to breath it is essential that it copes with
environment through its strengths and strategies and manages finance
effectively. An organizations Business & Financial performance plays a
leading role in deciding its position in the industry. Thats why I chose
this topic as it is even more important to know an organizations
performance during a Global Economic meltdown when markets have
been declining. Even more, this has been the major part of my studies
and I had a chance to enhance my knowledge and develop practical
skills in the area.
Reasons for choosing the Industry:

I chose automobile industry as it is a major sector of the country
having a major contribution to the economy.
Secondly, I wanted to know about challenges being faced by the auto
sector during the financial crisis.
Thirdly, I was curious to know about the key players of the industry and
to find out about ones performance.
Reason for choosing the Company:

Honda Atlas is a joint venture between Honda Motor Company Japan
and the Atlas Group of Companies Pakistan. The Company incorporated
about 20 years ago in 1992.
The reason I chose this Company is that it is one of the few leading
carmakers in Pakistan having a strong share in overall automobile
industry.
Another reason was my personal fascination with the brand.
As it is a listed Company at all the Stock Exchanges of the country,
easy access to the F/S was another reason to choose.

3
Project
Aims and Objectives:
I aim to achieve the following objectives:
Carrying out the financial analysis ofHACPL in order to:

Know how successful it has been in generating earnings and
covering and controlling costs in the relevant periodby analysing
profitability of the Company.
Analyse the short-term liquidity of the Company during the
financial crunch.
Understand the impact of its capital structure on its long-term
solvency.
Analysing Companys activities impact on its working capital
management.
Understand the impact of its operations on the investor`s
confidence and share price volatility.
Carrying out business analysis of the Company to:
Obtain an understanding of the impact of the external pressures
on the internal operations and policies.
Examine the competitive pressures being faced by the Company.

4
Research
Questions:
How will I utilize my time in order to complete my project within time?

What sources of information will I access to gain the necessary
information?
What models will be used in order to achieve objectives of my RAP?
Which ratios will be calculated and interpreted for the financial
analysis?
What models should be used to target my objective for the business
analysis?
What are the required IT skills?
What ethical problems I might face during the research?
Research Approach:
To initiate I will gather general information about the Automobile
industry to gain an understanding of current and future prospects of
the industry and the factors that are affecting it.
Then I will develop an understanding about the Company that I require
for the purpose of my analysis. After that I will calculate and then
interpret financial ratios using information that I gathered during my
initial research. Then, using appropriate business models and
techniques I will try to comprehend the effects of the macroenvironment on the policies and operations of the Company. I will also
try to verify and validate my assumptions through different information
sources. I intend to use both primary and secondary sources to gather
and validate information about the Company.
Then on the basis of my analysis I will draw conclusions and will give
recommendations accordingly.

5
Information gathering and business models used

Sources of Information:
Two sources could be exploited for the purpose of information collection; The
Primary and the Secondary sources. Primary Information sources are those
that are closest to actual event, time period or individual in question. These
present original thinking and observations such as original research used to
write journal articles, reporting on original scientific studies, experiments or
observations (Solomon, Wilson and Taylor, 2011). Secondary sources of
information consist of descriptions and explanations that are created after a
historical event has already taken place (American BookWorks Corporation,
2010).
Information Gathering:
Primary Information:
Followed by telephonic calls I paid a visit to the Companys office seeking to
arrange a meeting with the management. I managed to obtain an
appointment for meeting with the Companys finance manager
MrAsadMurad, in which I interviewed him according to the questionnaire I
prepared beforehand to resolve my queries and to collect information about
the Company.
Secondary Information:
Wide range of secondary sources was used to corroborate the information
and to validate the interpretations made in the financial and business
analysis. The following sources were used:
Annual Audited Reports: These reports provided general information about
the Company and data to be used for purpose of ratios calculation.
Internet: Though relatively less reliable, internet provided vast knowledge &
information about the industry, Company and much about the macroenvironment surrounding such as Governments policies and economic
factors.
Newspapers, Journals & Articles: They were used to get the related
information about the automobile industry and the Company.

Analysts Reports: I went through analysts reports and watched business
6
channels to get a walk through of the general status of the industry and the
Company and general state of countrys economy and political situation.
ACCA and other Textbooks: Text books form the college library was used to
refresh the Business and Financial models and techniques Ive applied for the
purpose of business & financial analysis.
ACCA Student Accountants Magazines: They were used to keep an eye on the
articles to keep updated with the latest developments in the profession.
Limitations of Data Gathering:

Seeking newspapers and searching over the internet used to bring a lot of
data and hunting the exact requirement absorbed a lot of energy and
occupied a lot of time.
Different analysts had conflicting views and generated confusion about
future prospects of the government, industry and the Company. It was often
strenuous to make judgment.
The library had just a few numbers of latest editions of books and they often
were not available being issued to other students and numerous visits to
library were need to made.
Ethical Issues:
Being Professional accountants we need to observe ACCAs code of ethics so
I remained prudent throughout preparation of this RAP.
Confidentiality was not an issue as all the information used was publicly
available.
During the preparation of thesis, I interacted with certain people of
undesirable attitudes but I
maintained professional behaviour.
Referring to latest editions of the books and student accountant magazines I
kept myself upgrade with professional updates.

7
Business
and Financial Models used:
The techniques and models that I used for the purpose of Business and
Financial analysis are:
Ratio Analysis:
Its a tool for F/S analysis. It can be used to develop a set of statistics that
reveal key financial characteristics of a Company. (Droms and Wright, 2010)
Advantages:
Makes easy to grasp relationships between various items.

Provides comparative study of various businesses.
Highlights changes that took place between time periods.
Limitations:
Often future forecasting becomes difficult with ratios.

Inter-related. Single ratio cant convey any meaning.
Quantative measures. Ignores qualitative aspects.
(Murthy and Gurusamy, 2009)
SWOT Analysis:
SWOT Analysis is a careful evaluation of an organizations internal strengths
and weaknesses as well as its environmental opportunities and threats.
(Griffin, 2011)
Advantages:
Impetus to analyse a situation and develop suitable strategies.

Assesses core capabilities and competences.
Evidence for and cultural key to change.
Limitations:
Generate long lists.

Ignore prioritisation.
Descriptive rather than analytical.
(Mard, et al., 2004)

8
PEST Analysis:
Its a tool for analysing a business and, in particular understanding market
growth or decline. (Chapman, 2011)
Advantages:
Increase awareness of environmental change.

Facilitates risk management.
Acts as an early warning to anticipate opportunities and threats and
plan accordingly.
Limitations:
Contradicting changes may take place.

Pace of change may create unpredictability.
By the time one change is addressed another may have occurred.
(Evans, Campbell and Stonehouse, 2003)
Porters Five Forces:

Its a framework for industry analysis and business strategy development. It
defines competitive intensity and therefore the attractiveness of a market.
(Grunig and Kuhn, 2010)
Advantages:
Enables organisation to determine attractiveness of a particular

industry.
Enables organisation to assess its ability to compete effectively in
the industry.
Provide indication of the future profits in the industry. (Henry, 2008)
Limitations:
It implies suppliers, buyers and competitors are threats whereas

strategies could be made by collaboration.
It claims to assess industrys profitability while Company specific
factors are more important.

9
It implies that five forces equally apply to all competitors in the

industry whereas forces may differ from business to business.
(Tiwari, 2009)

10
Results, Analysis, Conclusions and Recommendations:

Industry Information and Company Profile:
To the countrys manufacturing sector, auto sector contributes 16%
with Japanese companies dominating by producing and selling most of
the outputs. Majority of annual demand of auto parts of $0.96 billion is
manufactured locally and around 22% is imported. (Rohail, 2008)
Currently there is investment of PKR 98 billion (Pakistan Today, 2011)
in the auto sector and its contribution to the GDP is more than 12
billion rupees and to the national exchequer is PKR 40 billion (Toyota,
2011a). EDB is seeking to even increase this contribution. Moreover,
EDB is trying to enlarge the production capacity and to gain US $3
billion investment in the industry and attempting to grow exports to US
$650 billion. (Haq, 2009)
However, the local industry is facing pressures from the government as
sales tax raised from 16% to 17% and depreciation allowance on
imported cars increased from 50% to 60% (Honda Atlas Cars (Pakistan)
Limited, 2011a). Inflation and exchange rates variations have strained
costs. Another challenge for the local carmakers is the increase of age
limit of imported used cars from 3 to 5 years (Khan and Khan, 2010).
HACPL is one of the major car assemblers in Pakistani market (Khan,
2011). It is controlled by Honda Motor Company Japan which holds 51%
shares. It has its Sales, Services and Spare Parts dealership networks
spread around in all the major cities of the country. It offers four
brands: Honda CR-V, Honda Accord, Honda Civic and Honda City.

11
Profitability
Analysis
Profitability Ratios
2011
HACPL
2010
2009
2011
TOYOTA
2010
2009
%
Gross
Profit
Margi
n
Net
Profit
Margi
n
ROCE
0.90
-1.51
1.25
6.63
8.08
6.14
-1.35
-5.38
-2.84
4.45
5.73
3.66
-4.42
-16.10
-9.23
28.73
42.44
20.13
0
2009
-5
2010
2011
GP
NP
-10
ROCE
-15
-20
GP Margin:
FY 09:
The GP decreased by 71.87% led by the huge decrease in sales of
3.85% and relatively lower decrease in COS of merely 0.82%.

12
Costs inflated uncontrollably following the recession which in-turn

negatively influenced the inflation and exchange rates fluctuations.
35% cash margin of imports of parts was also levied by the
government (Honda Atlas Cars (Pakistan) Limited, 2009a). HACPLs
management were unable to predict the economic recession and
enhanced production capacity to 50000 units from 30000 (Honda Atlas
Cars (Pakistan) Limited, 2010a) units which led to extreme
underutilization of capacity over these periods, thus further increasing
fixed costs and management remained unable to control the swell in
costs.
Due to the financial crisis and therefore, weakening purchasing power
parity, overall sales went down. The government raised sales tax by
1% and FED of 5% was imposed (Honda Atlas Cars (Pakistan) Limited,
2009b) and vehicles thus got expensive. Honda City, HACPLs main
product was at its decline along with intense competition from the
major assemblers subcompact cars decreased its sales by as much as
83% (Institute of Business Administration, 2010a). It was late this year
when the new 3rd Generation model of Honda City was launched
(Honda Atlas Cars (Pakistan) Limited, 2009c) and therefore it was not
much helpful in saving the reducing sales. To exacerbate, most banks
withdrew car financing facilities (Hallian, 2009). Thereby, Industry sales
went down by 50% and Honda Atlass by 28% (Institute of Business
Administration, 2010b).
GP therefore fell due to the worsening economy, lost sales and certain
future events that management could not have predicted beforehand.
FY 10:
There was further a larger decrease in GP of 235.72% despite 12.05%
increase in sales. With 15.18% increase in COS, the GP ratio was
-1.51%.
HACPL remained deficient in controlling costs due to economic upset.
PKR lost sustainability and severely depreciated against Yen (Figure 1,
Appendix) and US $ (Figure 2, Appendix) together with inflation
resulting in increasing prices of raw materials to which 77% rise in the
international steel price (IBA, 2010) added too. The underutilization of
the capacity kept pressure on the production costs (Interview,
Appendix).

13
However, following the introduction of new Honda City model and

reasonable prices, sales experienced rise. Later this period economic
condition improved and commercial banks restored their position in
consumer financing (Osama, 2010) encouraging the demand despite
rising costs. The government helped a little by withdrawing the FED on
locally assembled cars (Honda Atlas Cars (Pakistan) Limited, 2010b).
The Company therefore achieved growth in sales but due to large
increase in costs that could not be completely passed on to the
customers due to competitive prices (Interview, Appendix) the GP fell
significantly.
FY 11:
GP attained health increasing by 183.20% achieving GP ratio of 0.9%.
Sales considerably increased by 38.93% with lower increase in COS of
35.62%.
Such an increase in COS was due to immense increase in Raw
Materials costs bringing undue pressure on management to maintain
the costs. The price of steel sheets went high almost by 50% per ton
and price of aluminium primary ingot rose by 59% per pound (Jamal,
2010a). Similarly, the cost of rubber also expanded globally (Kumar,
2009). Further pressurising COS, Yen gained nearly 10% against PKR
making import of high tech parts, like CKDs which are almost 35% of a
products cost, even expensive (Jamal, 2010b). The introduction of new
accessories (Honda Atlas Cars (Pakistan) Limited, 2011b) also added to
costs. Fixed costs remained high due to capacity underutilization
(Interview, Appendix).
Hence, Selling Prices increased, also incorporating the rise in sales tax
of 1% (Honda Atlas Cars (Pakistan) Limited, 2011c). Surprisingly,
customers behaviour remained positive despite political and economic
tensions. Sales increased incredibly (KHan, 2011). It was deduced that
the growth in the agricultural sector particularly Rabi season crops
(Khan, 2010) increased the spending of the country and the
introduction of new accessories in the Honda cars captured the interest
of customers. The growth in car financing facilities also backed up the
increase (Honda Atlas Cars (Pakistan) Limited, 2011c).
Therefore, despite raised costs Company performed excellent in sales
thus improving GP.

14
10
6
HACPL
TOYOTA
0
2009
2010
2011
-2
Competitor Comparison
Toyota has been the foremost competitor of HACPL and has been
performing way better than HACPL in GP over the years due to its
higher market share and costs management. Toyotas management
has been controlling costs through application of Kaizen costing
methodology (Toyota, 2011b) which include the elimination of waste in
the production, assembly and distribution process as well as
elimination of work steps in any of these areas (M. Bragg, 2009).
Higher sales resulted in better capacity utilization and lower fixed costs
than HACPL.

15
NP Margin:
FY 09:
The NP ratio reduced dramatically to -2.84% as compared to the last
years 0.5%.
Subsequent to fall in GP, Company reduced advertisement expenses
despite launch of new models keeping costs under control. Achieved
257% rise in profits on deposits owing to high deposit rates (Figure 3,
Appendix) was advantageous; however fuel & power prices went up
during the year increasing operating costs. Up to 31% increase in
electricity prices (The Nation, 2008) and 127.43% in Gas prices (Daily
Times, 2010) occurred. Company faced huge exchange losses during
the period as currency miserably weakened against Japanese Yen and
US $ (Figure 1 and 2, Appendix). PPE and old Honda Citys parts
written-off further contracted profitability. FC remained unchanged as
borrowing costs of raised long-term loans were capitalized to PPE.
(Honda Atlas Cars (Pakistan) Limited, 2009d) Effective tax rate was
-35.43% as compared to 17.90% last year to due to 83.37% reduction
in current tax because of Company making loss (under section 113 of
income tax ordinance, 2001 a Company is charged minimum tax on
turnover in case of losses) and 69% increase in deferred tax assets
mainly comprising unused tax losses aided profitability slightly.
FY 10:
NP declined to -5.38%.
Following huge fall in GP, management extensively reduced
advertisement expenses keeping costs under check. Profit on bank
deposits sharply decreased shrinking profitability as after huge
investments last year, Company commenced year with a heavy
overdraft (Interview, Appendix). Despite rise in costs of electricity
(Business News, 2010) and gas (Aqeel, 2010) fuel & power expenses
lowered slightly sinking costs as the production level decreased. Since
last year exchange losses lessen as currency became relatively stable
(Figure 1 and 2, Appendix) and Companys overall exposure to
currency risk reduced. Narrowing profitability, FC increased by 104%
due to newly availed loans by Company to finance investment for new
car models. Enlarged sales raised current tax by 654.14% with lesser

16
deferred tax assets rise of 40.56% upraised effective tax rate to

-13.74% dipping NP.

17
FY 11:
NP rose by 65% to -1.35%.
As GP attained health, Company enhanced spending on advertisement
of new car models with new accessories, burdening costs. With
healthier cash-flow status, Company gained enormous rise in profit on
deposits enjoying high deposit rates (Figure 3, Appendix) improving NP.
Production rose and electricity and gas prices went up by 15% (Umeed,
2010) and 8% (Zeeshan, 2010) respectively, fuel & power expenses
ascended raising costs. The currency further depreciated and increase
in Companys currency risk exposure increased exchange losses. Aided
by liquidity support on CKD supplies by the Holding Company, HACPL
repaid short-term & long-term borrowings achieving reduction in FC.
Effective tax rate reached 21.90%. 103.77% rise in current tax was the
upshot of increased sales with increase of 15.42% in deferred tax
assets available to net off.
8
6
4
2
HACPL
TOYOTA
0
2009
2010
2011
-2
-4
-6
Toyotas strong performance in GPs cushioned it from inflated prices
and preserved the NP ratios. Toyotas profits on bank deposits were
grander than HACPLs due to stronger cash position. Unlike HACPL,
Toyota kept its currency risk low by entering foreign exchange

18
contracts (Toyota, 2011c) and so lower exchange losses. Toyota has not
been using borrowings and so had much lesser FC than HACPL
consisting only of mark-up on advances from customers and the bank
charges.
ROCE:
FY 09:
ROCE was -9.23% compared to the last years 8.81%.
OP fell by 234% and the Company went to loss, unable to generate
return on Capital invested. Equity decreased due to increased
accumulated losses yet CE increased due to raised long-term finance
for the investment in Capital expenditure (Honda Atlas Cars (Pakistan)
Limited, 2009e) of the new model of Honda City.
Company thus appeared to be underutilizing resources.
FY 10:
ROCE even deteriorated to -16.10%.
OP even worsened by 33% and despite decreased CE due to reduction
in renewed long-term finance with part of it becoming current and
decrease in equity on account of increased accumulated losses and
transfer of reserves to P/L, ROCE further shrunk representing further
underutilization.
FY 11:
ROCE improved to -4.42%.
Companys improved performance achieved a reduction in operating
loss of 83% but Company still failed to produce return. The year added
lesser to accumulated losses but due to large transfer from reserves to
P/L, equity reduced. Company reduced its long-term finance (Honda
Atlas Cars (Pakistan) Limited, 2011d) by 69% as well and therefore
overall CE reduced.
Consequently, ROCE became better but the persisted negative figure
still presented poor utilization of resources.

19
50
40
30
20
TOYOTA
HACPL
10
0
2009
2010
2011
-10
-20
Toyota remained profitable and ungeared and has been earning much
higher returns on CE than HACPL thus, much better ROCE.

20
LIQUIDITY
ANALYSIS
Liquidity Ratios
2011
HACPL
2010
2009
2011
times
TOYOTA
2010
2009
Curren
t Ratio
0.67
0.62
0.70
1.84
1.67
1.69
Quick
Ratio
0.26
0.21
0.17
1.38
1.31
1.28
0.8
0.7
0.6
0.5
Current Ratio
0.4
Quick Ratio
0.3
0.2
0.1
0
2009
2010
2011
Current & Quick Ratio:

FY 09:
CR was 0.70 times, even riskier compared to last years 0.80 times.
Despite 91% decrease in cash & bank due to huge cash used in
operations and heavy investments, CA increased by 61% mainly
because of 83% rise in stock level as sales lessened. The CL raised by
82% when Company obtained short-term loan to finance working

21
capital requirements of the new car model. (Honda Atlas Cars

(Pakistan) Limited, 2009f)
Matching just the liquid CA with CL gives QR of 0.17 times which was
dangerously low as stock has been the major part of CA.
The destabilized liquidity concerned investors as it could lead to goingconcern issue in future.
FY 10:
CR worsened to 0.62 times.
Despite improved cash & bank balances due to high cash from
operations and lower investments than last year the CA decreased by
11% due to immense decrease in finished goods stock as sales
increased. Company paying off short-term loan did not lessen CL as
other payables, particularly bills payable (1054% rise) increased
considerably. (Honda Atlas Cars (Pakistan) Limited, 2010c)
QR improved just a little to 0.21 times as all current liquid assets,
mainly cash & bank increased.
For Investors, even poorer liquidity meant trouble for the Company in
the future.
FY 11:
CR increased insignificantly to 0.67 times still being treacherous.
CA raised by 61% by virtue of increased CKDs stock as Company was
trying to stock as much as possible due to future uncertainty about
supply chain as Japan was hit by natural disaster. Moreover, advanced
cash-flow position raised cash & bank by 959%. CL increased by 50%
due to increase in current portion of long-term loan and increased
trade & other payables including 94% rise in bills payables. (Honda
Atlas Cars (Pakistan) Limited, 2011e)
The increase in cash & bank balances raised CA improving QR to 0.26
times.
The Companys liquidity throughout these years has been risky
indicating cash-flow difficulties. However, credit payment support

22
from holding Company on CKD supplies to some extent was a comfort.

(Honda Atlas Cars (Pakistan) Limited, 2011f)
2
1.8
1.6
1.4
1.2
HACPL Current Ratio

HACPL Quick Ratio
TOYOTA Current Ratio
0.8
TOYOTA Quick ratio
0.6
0.4
0.2
0
2009
2010
2011
Toyota maintained almost twice the CA than CL by having high cash & bank
and stock levels due to high market share than HACPL. Whereas HACPLs CA
have been lesser than CL due to much lower cash and bank and stock levels
than Toyotas. Unlike HACPL, Toyota did not rely on short-term borrowings.
Therefore Toyotas current and quick ratios have been much superior to
HACPLs.

23
SOLVENCY
ANALYSIS
Solvency Ratios
2011
Gearin
g
Ratio
(%)
Intere
st
Cover
(times
)
HACPL
2010
2009
2011
TOYOTA
2010
2009
19.90
40.29
34.66
0.00
0.00
0.00
-0.61
-1.17
-1.79
88.77
53.50
78.02
45
40
35
30
25
Gearing
20
Interest Cover
15
10
5
0
-5
2009
2010
2011
Gearing:
FY 09:
Gearing Ratio of the Company rose to 34.66% led not only by
decreased equity but also by huge increase in long-term liabilities.
Besides reduction in equity due to huge rise in accumulated losses the
large increment in long-term debt as Company obtained new loans for

24
purpose of capital investments abruptly increased the gearing and

discomforted the shareholders by increasing the financial risk.

FY 10:
25
Gearing ratio rose to 40.29% due to further decrease in equity and

sustained reliance on long-term borrowings.
There was a further fall in equity on account of huge increase in
accumulated losses further elevating the gearing. Company renewed
its Long-term loans.The minor decrease in long-term loans figure was
due to part of it becoming current.
Raised gearing was of concern to investors as already negative
profitability had to bear further FC.
FY 11:
Gearing ratio dropped to 19.90% owing to reduction in loans.
After major portion of reserves were transferred to P/L, equity further
decreased. Long-term debt fell with larger percentage as Company
fully repaid one of its loans and half of remaining loan became current.
Hence, Gearing relaxed decreasing the degree of risk of equity holders
providing them ease.

26
45
40
35
30
25
HACPL
20
TOYOTA
15
10
5
0
2009
2010
2011
Toyotas Capital Structure only consisted of equity and so it was not
geared whereas HACPL`s gearing kept fluctuating by the use of
borrowings to finance their capital & working capital requirements
keeping the gearing high.

27
Interest Cover:
FY 09:
Interest Cover turned -1.79 times from 1.3 times last year due to
Company making loss.
Although, substantial loans obtained did not affect FC as the borrowing
costs were capitalized to PPE,(Honda Atlas Cars (Pakistan) Limited,
2009g) OP since last year decreased by 234% turning into loss which
turned interest cover negative reducing investors confidence and
raised questions about management of the Company.
FY 10:
Interest Cover was -1.17 times.
Although Companys FC raised owing to long-term and short-term
loans obtained for the Capital and Working capital requirements of the
new Honda City model but as operating loss increased by lesser
percentage of 33% than 234% last year resulting in lesser difference
between FC and Operating loss, interest cover demonstrated a minor
improvement. Company couldnt cover its FC indicating profitability
was too low given the gearing of the Company.
FY 11:
Interest Cover improved to -0.61 times with decreased FC and reduced
loss.
As Company reduced its loans helped by credit payment facility by the
Holding Company, there was a large decrease in FC. Operating loss too
achieved 83% reduction improving ratio, but improvement was yet not
enough for the Company to cover its FC.
Shareholders thus remained disappointed.

28
100
80
60
HACPL
40
TOYOTA
20
0
2009
2010
2011
-20
As Toyota remained un-geared its FC has been much lesser than
HACPLs consisting only of mark up on advances from the customers
and the bank charges. Earning delightful OP, Toyotas Interest Cover
has been exceptionally well than HACPLs over these periods.

29
EFFICIENCY
ANALYSIS
Efficiency Ratios
2011
HACPL
2010
2009
2011
Days
TOYOTA
2010
2009
Payabl
e Days
10
Invento
ry Days
58
53
77
36
34
42
90
80
70
60
50
Payable Days
40
Inventory Days
30
20
10
0
2009
2010
2011
Payable Days:
FY 09:
Payable days were 10 rose from 3 days last year as creditors raised.
Trade Creditors rose by 204.35% from last year. Due to the economic
recession Companys sales fell together with colossal cash used in
operations. Furthermore, Company heavily invested during the year in
NCA. Therefore, due to feeble cash position, Company faced difficulty
in payments increasing creditors affecting WC management adversely.

30
FY 10:
Payable days halved to 5 owing to reduced creditors.
Despite 15% rise in COS, Trade creditors reduced by 40.02% reflecting
tightening credit facilities after HACPLs deteriorated financial
performance and cash position last year. However, with sales rising,
cash position grew stable and Company timely paid back its creditors
and improved its WC management.
FY 11:
Payable days became 7 as creditors rose.
There was an increase of 36% in COS and 67.19% in creditors. Due to
future doubt over CKDs supply chain being affected due to tsunami in
Japan, Company was increasing stock of CKDs (Interview, Appendix) in
attempt to avoid future stock outs, and thus raised trade payables.
Companys revived financial performance and Cash position earned it
extended credit period.
12
10
8
HACPL
TOYOTA
4
2
0
2009
2010
2011
Toyotas Payable days were not much different from HACPLs.

31
Inventory Days:
FY 09:
Inventory days were 77 compared to 42 days last year as stock rose.
There was a huge increase in finished goods stock due to steep fall in
Honda City sales representing slowdown in trading due to the models
decline stage and economic fall down.
The inventory days hence increased, undermining WC.
FY 10:
Inventory days fell to 53 with decreased stock.
There was a vast decrease in finished goods stock indicating of re
growth of sales following introduction of new car model and re-entry of
consumer financing services with slight improvement in economy. The
working capital thus improved.
FY 11:
Inventory days rose to 58 with increased stock.
Immense increase in raw material described this rising. Major supplier,
Japan struck by natural disaster was going to affect future CKD
supplies and so Company was acquiring as much as it could to avoid
stock outs (Interview, Appendix).

32
90
80
70
60
50
HACPL
40
TOYOTA
30
20
10
0
2009
2010
2011
Due to higher sales and thus higher inventory turnover than HACPL,
Toyotas inventory days remained better than HACPLs over these
years displaying better WC performance by Toyota than HACPL.

33
INVESTORS
ANALYSIS
Investor's Ratios
2011
HACPL
2010
2009
Earning
per
Share
(PKR)
-2.09
-5.97
-2.81
34.90
43.81
17.62
Share
Price
(PKR/Sha
re)
10.00
16.00
12.00
220.00
262.38
107.72
Price
Earning
Ratio
(times)
-4.78
-2.68
-4.26
6.30
5.99
6.11
2011
TOYOTA
2010
2009
20
15
10
EPS
5
Share Price
P/E
0
2009
2010
2011
-5
-10
EPS:
Number of shares did not change during the three years therefore the
change in EPS has been solely because of the earnings. HACPL being in

34
losses generated negative EPS for all three years of -2.81/share,

-5.97/share and -2.09/share in 2009, 2010 and 2011 respectively.
50
40
30
HACPL
20
TOYOTA
10
0
2009
2010
2011
-10
Toyota with healthy profits generated attractive EPS in all three years
of 17.62, 43.81 and 34.90/share respectively while HACPLs losses
produced negative EPS.

35
P/E Ratio:
FY 09:
MP of HACPLs shares fell to PKR 12 from PKR 44 last year. The P/E ratio
became -4.27 times compared to last years 83.02 times.
Reduction in earnings played havoc on performance of the Company
along with difficulties in management of liquidity and recession in the
country reduced investors confidence leading to sudden slump in MP.
Together with negative EPS, P/E fell exceedingly.
FY 10:
Share price rose to PKR 16. The P/E ratio became -2.68 times.
Though Company made further loss increasing loss per share together
with continued delicate liquidity, investors confidence rose after huge
investment by Company in new Honda City that resulted in increased
sales (Interview, Appendix). MP of shares hence rose in expectancy of
future success and P/E became better.
FY 11
Share price fell to PKR 10 and P/E ratio to -4.78 times.
Despite notable rise in sales HACPL yet remained lossmaking as even
costs rose significantly along with continuous poor liquidity. Company
also not declaring dividends for a longer period reduced investors trust
and share price and P/E ratio thus fell.

36
8
6
4
2
HACPL
TOYOTA
0
2009
2010
2011
-2
-4
-6
Toyotas profits over these years and payment of dividends kept
investors trust and thus MP high. Together with Toyotas attractive
EPS, its P/E has been much better than HACPLs.

37
SWOT
ANALYSIS
STRENGHTS:
Strong brand loyalty and smart
marketshare.
ISO 9001(QMS) and EMS
certified and therefore
maximum quality focused and
environmental friendly.
Providing greatest passenger
safety through ABS, SRS & GCON technology and fuel
efficient cars via i-VTEC
technology.
Countrywide sales, services
and spare parts dealership
networks and therefore
presence and sales in all the
major cities.
Credit support from the Holding
Company on CKD supplies
comforting cash position.
WEAKNESSES:
Higher car pricesacting
adversely on market share.
(Daily Times, 2011)
Capacity underutilization
creating high fixed costs.
Inefficient costs management.
Not providing smaller cars that
have the maximum demand.
(Pak Top 10, 2011a)
Reliance on borrowings and
therefore high FC.
(Honda Atlas Cars (Pakistan) Limited,

2011d)
OPPURTUNITIES:
THREATS:
Global demand for more fuel
Rising fuel prices making
efficient cars such as hybrid
use of cars uneconomical for
cars and applying latest
consumer. (Tirmizi, 2012)
Power shortage distressing

technology to target this
production. (APP, 2012)
demand can capture more
Swelling raw material prices
market share. (Deloitte,
increasing input costs which
2012)
Higher demand for smaller
may make production
uneconomical.
cars and diversification
Government supporting new
therein can achieve
competitors raising rivalry.
enhanced market share and
Uncertainty over future
better capacity utilization.
supply of CKDs may lead to
(Pak Top 10, 2011b)

38
Escalating sales due to

growth in agriculture sector
can grab healthier suppliers
relations by negotiating
improved credit policies.
(PAKISTAN Today, 2011)
stock outs.
Cheap imitates and
smuggled auto-parts
harming Companys autoparts business. (The Dawn,
2012)

39
PEST
ANALYSIS
POLITICAL:
Political factors are connected with government and its policies relating
business.
Government is attempting to knot-up long-term automobile policies with
Japan (KHAN, 2011). Government is also providing free of cost seeds to boost
up agriculture to advance economy and spending (Asif, 2011). However,
continued changing government policies are unpleasant for the auto sector
(Interview, Appendix) and government is not trusted by foreign investors.
Government raised sales tax and age and depreciation limit of imported used
cars to inspire competition. AIDP which was set to take the auto sector up is
expiring in near future and needs to be redeveloped (Rind,2012). Power
shortage has not for long been resolved by government keeping industry
under operational constraints.
ECONOMICAL:
Economic factors relates to general state of countrys economy.
Economy has gone down. In recent years inflation has run very high. This
means expensive inputs, increased selling price and affected sales. Interest
rates have gone up generating higher return on deposits but resulting in
higher borrowing costs. Regularly rising fuel prices are making use and
manufacturing of cars uneconomical. Recent floods left devastating effects
on agriculture sector massively declining farm income though government is
promoting the sector that will rise future spending. Although car financing
facilities are growing (Sabir, 2011), economy has touched the worst
extensively weakening purchasing power with worst effects on imports.
SOCIAL:
Social factors are related to the culture and trends of the countrys
population.
Most Pakistani population are middle class families (Jafri, 2011) mostly being
able to afford small economical compact cars. HACPL only offers subcompact
luxurious cars with high maintenance and prices. Japan tsunami has
disrupted the supply chain raising car and spare parts prices which will

further discourage demand for expensive cars. High illiteracy (Javed, 2010)
40
means shortages of educated and capable workforce resulting in high
training costs but cheap labour availability.

TECHNOLOGICAL:
41
Technological factors relate to the availability and reliability of the

technology in the country required by a business.
HACPL use imported Japanese technology and provides auto-parts locally as
technology has been transferred to Pakistans OEM (Mirza, 2010). Public has
alternative sources too such as smuggled parts at low prices and cheap
imitates. Government has spent heavily on roads infrastructure (Business
recorder, 2012). HACPL provides countrywide auto-parts and services.
PORTERS FIVE FORCES ANALYSIS
THREAT OF NEW ENTRANTS:

These are the threats that potential new entrants will enter market.
Existing carmakers including HACPL have gathered a vast know how of
customers and have created brand loyalty building barriers to entry. Capital
requirements are high. However HACPL has not been able to achieve
economies of scale working far under capacity. Switching costs are low.
Government is providing relief to newcomers by reducing levies on imports
for primary years (Rind, 2011) and encouraging Indian (Ali, 2012), South
Korean and Chinese manufacturers (Hussain, 2011). Therefore, threat is high.
THREAT OF SUBSTITUTE PRODUCTS:

These are the threats that customers will move to some
alternative/replaceable product or technology with comparable price,
performance and Capital expenditure by similar or another industry that
satisfies the same needs.
There are alternative sources people can use to travel by like motorbikes and
public transports including busses, vans and three wheelers but these are in
no comparison with a personal own car. Therefore only substitute for HACPL
cars would be competitors and used imported cars. With regular increase in
fuel prices such as petrol, diesel and CNG, the customers are turning to lower
maintenance, lower fuel consumption cars i.e. 800 and 1000 CC cars.
Nevertheless, by maintaining quality at affordable prices HACPL has created

strong brand loyalty and Honda users would prefer not to move to lower
42
quality products. Therefore threat is low.
BARGAINING POWER OF SUPPLIERS:

These are the factors that indicate position of suppliers of the industry.
For auto sector there are technological and other auto-parts required. For
technological parts HACPL depends on Holding Company and the group to
supply parts. Bargaining power here would be high. As for suppliers of other
parts such as steel, aluminium, rubber etc. the bargaining power is low
because there are many such suppliers, low switching costs and there are
only a few leading car makers in the country and if Company decides to shift
to another supplier there would be a drastic effect on the supplier. Hence,
the overall threat is moderate.
BARGAINING POWER OF CUSTOMERS:

These are the factors that indicate the position of the customers of the
industry.
Bargaining power of customers is high as there are many options available to
them including competing carmakers and lower price imported cars.
Switching costs are low. However, HACPL has maintained the customers
loyalty by providing high quality at reasonable prices and use of latest
technology to make products fuel efficient and safe for customers. It has
developed dealership networks all around the country providing sales and
after sales services. The government however, is putting pressure on
automakers to reduce their prices (Jamal, 2010). The power is high.
COMPETITION AND RIVALRY:

These describe the nature of local market competition.
The local market has become saturated, main rivals being the leading
carmakers. Plus government has raised competition by providing relief to
used imported cars. There are price wars going on between rivals and costs
to exit the business are high. Government is still trying to bring in new
competitors which mean that already under capacity working companies
would face more trouble. The competition therefore, is very high.

43
Conclusion and Recommendations

HACPL holds a major share in Pakistans automotive sector. However, its
performance in recent years remained lacklustre.
Companys profitability has been frail for the recent years as the recession
attacked economy. Devastating floods further eroded the situation.
Companys production capacity enhancement prior to these events led to
underutilization and therefore higher fixed costs. Companys one of the
mainstream product Honda City reached decline in FY09 and withdrawn car
financing facilities by banks deteriorated sales. Minor improvement in
economy and Companys introducing new model helped in achieving rise in
sales in succeeding years but continued currency devaluation and inflation
kept exchange losses high and profitability unstable. Interest rates kept
raising FC but brought in high profits on deposits too. Government remained
unkind by raising sales tax and encouraging competition. The competitor,
Toyotas high market share achieved better capacity utilization and cost
management through Kaizen costing kept its profitability well. The foreign
exchange contracts safeguarded it from exchange losses. Being ungeared, it
kept its FC minimal.
Short-term liquidity of Company too remained ominous. In FY09 huge
investments by Company placed it in weak cash position. Company obtained
short-term loan for working capital purposes which endangered its shortterm liquidity. Lately, though Company improved the cash status and paid off
short-term borrowings but high other payables kept short-term liquidity risky.
However, credit help by Holding Company to some extent comforted HACPL.
Toyota did not rely on short-term borrowings because of high cash levels
maintained and so had much better short-term liquidity.
Long-term solvency too has not been very satisfactory. Company has been
relying on long-term loans aiming to finance capital investments hence
raising gearing. Though lately gearing relaxed, the negative interest cover
during these years was of concern. This was on account of financial losses
and raised FC. Toyota remained independent of long-term borrowings and
had durable solvency.
The working capital remained questionable as well. Companys tensed
financial performance kept its credit period tight. Adequate level of inventory

has not been maintained as well. Toyotas inventory management has been
44
fine due to high sales.
Investors confidence in Company subsided as Company has been in losses
and have not been declaring dividends. EPS and P/E ratio went down. This
resulted in decreased share price. Toyota enjoyed profits and kept paying
dividends keeping investors confidence high.
HACPL has certain strengths such as strong brand loyalty created by

providing luxury at reasonable prices and strong market share but it needs to
cope with weaknesses like capacity underutilization and high production
costs. It has ability to cease opportunities like capturing the small cars
segment and to deal with threat of losing customers to competitors
substitute products and imported used cars.
The External environment has to be looked upon too. Governments
perpetually changing and unfriendly policies are harmful for the industry.
Deteriorated economic factors of inflation, interest rates, taxes, depreciated
currency, raw material and fuel prices had unfavourable impacts. There is
high demand for smaller cars, illiteracy and cheap labour availability. Original
auto-parts should be made available at reasonable prices to prevent losing
customers to cheap parts.
Barriers to entry by existing players and capital requirements are high but
government is supporting new entrants. Although there are no other
substitutes but competitors lower maintenance cars and imported used cars.
The overall suppliers power is moderate. Numerous providers, imported
used cars and low switching costs create high customer power. The saturated
market has created rivalry in the sector leading to price wars.
Although the country is emerging market for automobiles, political
uncertainty and terrorist activities are creating challenges. Economy has yet
not recovered. Inflation and depreciating currency are expected to keep
necessities high. Raw materials like steel are rising and future availability of
CKDs is a question. Rising fuel prices will create smaller cars demand.
Though government is to reduce 3.5% in duties & taxes () but is further
encouraging competition now by approving Indian auto imports () increasing
customers power. Therefore I think the sector has challenging future.
However, much is dependent on successor government that follows after
2013 elections.

45

46
Recommendations:
I would recommend that HACPL should:
Try to reduce production costs through effective management.

Hedge against currency risk.
Try to increase credit period by building healthy relations with
suppliers.
Think about diversifying in smaller cars segment as this opportunity
will incredibly raise market share leading to better capacity utilization.
Maintain investors confidence by deriving a better dividend policy as
this is an important factor for long-term stability of the Company.

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