Motorcycle: ATLAS HONDA PAKISTAN LIMITED - Analysis of Financial Statements Financial Year 2007 - 1H Financial Year 2011

OVERVIEW (January 05, 2011) : 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. In addition, a third concern, Atlas Epak Ltd was taken over by the Government of Bangladesh. 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. Honda motorcycles are by far the largest selling motorcycles in the country with an unmatched reputation for high quality, reliability and after-sales-service. Atlas 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 at its Karachi and Sheikhupura plants. To support the production facilities, the company has established an R&D wing and tool making facilities through CDA & CAM which are growing rapidly in size and function as the company expands. Atlas has managed to execute 14 Joint Venture/Technical Assistance Agreements between local vendors and foreign manufacturers for transfer of technology. Besides, Atlas has directly executed 5 Joint Venture/Technical Assistance Agreements other than Honda. In addition, the company also launched a new model of CD 100 Euro-2 in the year 2009, launched a new model of CG 125 Deluxe Euro-2 and acquired ISO 14001-2004 Environment Certificate. MOTORCYCLE INDUSTRY Over all, the industry sold 1.2 million bikes in the financial year ended 2010 as opposed to 850,000 units the year before. After witnessing a 41% growth in motorcycles sales growth since last year, the industry is now expecting another 15% growth in the industry for FY11. Most of it attributed to a hike in petrol and prices of 4 wheelers which made motorcycles more attractive for the common man. In addition, water shortages and escalating steel prices are putting the present situation very challenging to operate in. Especially those players who are indulging in sales tax evasion, smuggling and under invoicing are making it very hard for the formal sector to achieve its target and hit economies of scale which are critical for exports. The motorcycle sector however, experienced an overall growth in sales of 44 percent over the last year. PRODUCTIONThe financial year 2010 witnessed an unprecedented increase in material process internationally coupled with an unfavorable exchange rate and jump in the commodity process locally. Atlas Honda, however, was able to absorb most of the cost impact by focusing on improved efficiency and process optimisation. Atlas Honda sold 483,028 units this year as against 359,525 units last year. RECENT RESULTS (1H11)Sales increased by 34% to be Rs 15.46 billion in 1H10 due to volume growth and a better sales mix. Resultantly, the gross profit margin has been maintained to previous period's levels. Rising inflation contributed to rise in all costs, which along with rupee depreciation would have kept pressure on the profits. However, a higher other income of Rs 156 million as compared to Rs 111 million helped yield a healthy PAT of Rs 431 million as compared to Rs 308 million, with an EPS of Rs

6.9 as compared to Rs 4.93. PROFITABILITY The cost of goods sold has shown a stark increase of 84% in FY10 from Rs 12.7 billion to Rs 23.5 billion. In tandem, total revenue also grew 85% from Rs 13.7 billion in FY09 to Rs 25.5 billion in FY10, the highest turnover the company has witnessed resulting to slight increase in profitability. Administrative expenses increased by 60% from Rs 165 million in FY09 to Rs 264 million in FY10. However, selling and distribution expenses took an even higher jump of 155% as compared to only increasing by 1% in the previous year. This increase was experienced due to greater integration with dealer network. The company has now expanded its dealership network from only 300 dealers in FY09 to 330 dealers in FY10 to improve accessibility and efficient service. A considerable increase was also witnessed in Atlas Honda's Operating Profit (EBIT) for FY10 as it increased by 97% from Rs 604 million in 2009 to Rs 1,189 million in 2010. Bottom line figure has also shown a robust increase vis--vis all the other increases. Net income after taxes has jumped 217% standing at Rs 712 million as compared to Rs 224 million in FY09. Looking at 1Q11 performance, we can expect that the company is likely to experience an increase in cost of sales by 26% whereas revenues are also expected to increase by 26% for the full year FY11. The administrative costs have shown a drastic shift from 0.55 billion in the last quarter to 0.75 billion, however, the impact is offset by an increase in operating income which increased by almost 50%. Operating expenses also showed slight increase, but the increase in operating income will offset that impact also. Most impressively, the company has been able to reduce the percentage of sales devoted to cost of goods sold from 92.79% to 92.29%. This was one of the drivers that led to a bottom line growth from 132.2M to 224.8M. Moreover, this growth in profits can be attributed to higher sales in the quarter and also to decrease in financial expense. The interest expense decreased by 26% as compared to the last quarter and this is likely to give a positive signal to the market. LIQUIDITY The liquidity of the company improved this year as the current ratio increased from 1.25 in 2009 to 1.49 in 2010. However the company showed a decreasing current ratio as compared to the last quarter. This is because the current assets rose by 15% whereas current liabilities increased by 27% because of an increase in trade payables. The quick ratio of the company also increased from 0.56 in FY09 to 0.93 in FY10. In order to increase its current and quick ratio further, the company needs to use its resources in more efficient manner to produce more cost-effectively. The ratio remained stable in this quarter and this can be accounted to increase in inventory. Inventory levels rose by 20% reflecting that most of the company's working capital is tied up in inventory which is not good for the company. DEBT MANAGEMENT The debt to asset ratio has decreased from 56% in 2009 to 54% in 2010. Debt to equity has shown a slight decrease standing at 1.19 as opposed to 1.25 in FY10. It would be favorable if Atlas Honda tried to reduce this ratio further. Overall, the low ratios indicate proficient use of debt by the company and signal a better solvency picture. TIE ratio has improved indicating that it has become easier for the company to make its

future payments in 2010 (10.6X) as compared to 2009 (2.4X) and has remained stable in this quarter also. The company has also experienced a decrease in its financial charges by 55% from Rs 251 million in FY09 to Rs 112 million in FY10. Cash position has significantly improved as well, a 158% rise shows that much cash is available however; excess cash should be put to speedy use in viable projects. Overall the performance of the company with respect to debt management has improved in the last year and has remained stable over this quarter. ASSET MANAGEMENT RATIOS Atlas Honda follows a policy of managing its assets in a consistent manner. The Day Sales Outstanding ratio has not improved much during this period but has dropped from 7 days in FY09 to 5 days in FY10. The ratio has again showed an increase to 7 days in its first quarter. Accounts receivable are among the industry's worst with 6.04 days worth of sales outstanding. This implies that revenues are not being collected in an efficient manner. Last, Atlas Honda Ltd is among the least-efficient in its industry at managing inventories, with 26.44 days of its Cost of Goods Sold tied up in Inventories. The operating cycle in 2010 has decreased and stands at 36 days as opposed to 55 days in 2009 and has further decreased to 29 days. This may be attributed to the better demand in the recent period that resulted in higher sales and inventory. The inventory turnover days has dropped 48 in 2009 to 31 in 2010 and further decreased in the 1st quarter to 22 days. Efficient conversion of inventory into sales and collection of receivables has helped the company to improve its cash position and provide the needed cash to retire its debt and pay it interest charges. The total asset turnover has doubled over the previous year indicating that assets were managed and utilized in a more productive manner in the year 2010. The sale to equity ratio has also shown and increase and it improved from 4.12 in the fiscal year 2009 to 6.56 in the fiscal year 2010, showing the company is more able to make use of its assets. MARKET VALUE The EPS shows a remarked improvement as compared to the 1st quarter of the last financial year. This quarter's EPS is Rs 3.059 as compared to 2.11 in FY10 showing an increase of more than 70%. FUTURE OUTLOOK The company believes in seeing a sustained growth in agriculture, manufacturing and service sector which will all indirectly bode well for the motorcycle industry. If foreign exchange reserves increase on the back of imports contraction coupled with continue strong remittances, the company for sees another year packed with growth and unprecedented sales revenue. Honda is, no doubt, the market leader with respect to motorcycle sales with 65% of production and sales belonging to Atlas Honda. However, with continued electricity shortages, water disruption, deteriorating law and order situation, rising inflation and depreciating Pakistan Rupee the motorcycle industry is in desperate need to revamp its focus and try to achieve economies of scale for exports. With respect to increased efficiency and cost reduction, Honda atlas has introduced in house and local manufacturing of high tech machine accessories and fixtures. Tool regrinding shop has been initiated to utilize dead stock and utilize unused items. The company also aims to continue with process automation at the Frame Assembly Line.

Steps such as modification of outdated dies, refurbishment of old dies local manufacturing of local dies and high pressure die casting are all aiding in alleviating cost and improve manufacturing timeline. The company is viciously eyeing on re-fixing safety levels, reducing lot sizes and decreasing lead time to improve inventory management. Given the current economic fundamentals of the economy marked by high domestic inflation, weakening rupee, rising interest rates, the overall politico-economic situation, the next year will be a challenging one. Historically the company has come through such critical situations successfully. Since the margins will remain under pressure, the emphasis would be on improving the manpower productivity and cost reduction, to show good results. =============================================================== ============== ATLAS HONDA FINANCIAL HIGHLIGHTS =============================================================== ============== Jun'07 Jun'08 9 mth Yr ended Quarter Mar'09 Mar'10 Ended Jun'10 =============================================================== ============== LIQUIDITY RATIO ----------------------------------------------------------------------------Current Ratio 1.29 1.31 1.25 1.49 1.35 ----------------------------------------------------------------------------ASSET MANAGEMENT ----------------------------------------------------------------------------Inventory Turnover (Days) 43.7 43 48 31 22.25 Day Sales Outstanding (Days) 6.12 6 7 5 6.94 Operating Cycle (Days) 49.82 49 55 36 29.19 Total Asset turnover 2.07 2.4 1.8 3 2.10 Sales/Equity 5.58 6.13 4.13 6.56 2.09 ----------------------------------------------------------------------------DEBT MANAGEMENT ----------------------------------------------------------------------------Debt to Asset (%) 63% 61% 56% 54% 59% Debt/Equity (Times) 1.70 1.56 1.25 1.19 1.43 Times Interest Earned (Times) 3.98 4.98 2.40 10.57 10.45 Long Term Debt to Equity (%) 56% 37% 28% 28% 27% ----------------------------------------------------------------------------PROFITABILITY (%) ----------------------------------------------------------------------------Gross Profit Margin 9.42% 7.50% 7.00% 7.80% 7.71% Net Profit Margin 3.33% 3.40% 1.60% 2.80% 2.80% Return on Asset 6.89% 8.08% 3.00% 8.36% 2.42% Return on Common Equity (Aft. Tax) 18.60% 20.70% 9.00% 18.30% 5.85% ----------------------------------------------------------------------------PER SHARE

----------------------------------------------------------------------------Earning per share 19.92 14.9 4.75 13.1 3.59