TO OUR PARENTS AND TEACHERS

ACKNOWLEDGEMENT
We are very grateful to Almighty Allah that He gave us the courage to complete this report within due time. We are also very thankful to our worthy teacher Altaf Hussain Samo for his benign guidance and help at every moment .we needed his support This report is a combined effort of all our group members. We all have put our .best efforts to make it more comprehensive, relevant and useful

TABLE OF CONTENTS

AUTO INDUSTRY IN PAKISTAN

THE INDUSTRY'S DOMINANT ECONOMIC FEATURES 04 THE PORTER'S FIVE FORCES 05 THE DRIVERS OF CHANGE IN THE INDUSTRY AND IMPACT THEY WILL HAVE 06 COMPANIES IN STRONGEST/WEAKEST POSITIONS 06 KEY SUCCESS FACTORS FOR COMPETITIVE SUCCESS 07

ECONOMIC ANALYSIS COMPANY OVERVIEW FINANCIAL ANALYSIS OF ATLAS HONDA PROJECTED FINANCIAL STATEMENTS VALUATION OF ATLAS HONDA STOCK RECOMMENDATIONS
09

08

10 13 16 17

AUTO INDUSTRY IN PAKISTAN

INTRODUCTION: The auto industry forms the largest portion in the world trade.It is the mother of the growing engineering industry with over 500 vendors and millions direct technicle jobs, and around billion rupees in duties and revenues that the government itself collects every year from this sector.History of the auto industry in Pakistan is as old as the creation of the contry itself.The initial work of automobile assembly in the country was started in early 1950s with Bed Ford Truck followed by Ford Perfect,Ford Cortina and Dodge Dart. 1.THE INDUSTRY'S DOMINANT ECONOMIC FEATURES: Market Size: Pakistan has one of the lowest numbers of vehicles per capita among the developing countries which is around 8 cars per 1000 people and therefore offers a lot of room for demand growth.At present automobile sales are mainly driven by easy access to auto finance. So still there we can expect huge market size for this industry because of increased power of purchase of the customers throughout the country and due to the readily available financing and attractive leasing schemes by financial institutions. Growth: The automobiles industry witnessed a growth of only 5.0 percent during the first quarter of FY08, compared with 11.1 percent achieved in the same period of FY07. The Q1-FY08 growth is the lowest first quarter growth since FY02. The growth in the automobile industry is generally influenced by the growth in the production of cars & jeeps with 64.1 percent weight in the sector. During Q1FY08, the production growth of cars & jeeps dropped to only 0.9 percent compared with 12.7 percent in Q1-FY07. Excluding the performance of cars & jeeps, growth in automobile sector accelerated to 17.1 percent, mainly contributed by rise in the production of motorcycles, LCVs and buses during Q1-FY08. Business Cycle: In Pakistan there is intensifying competition among industry players in auto sector and Pak Suzuki enjoys the position of market leader having 53% market share in car sales . Use of automobiles is increasing with a significant percentage. So it shows that this industry is in Consolidation stage. Segmentwise Production and Sales: There are different segments in this industry such as Cars,Buses,Trucks,Jeeps and LCVs(Light Commercial Vehicles),Pick up,Tractors and Motorcycles. There is different market for each segment. Similarly their buyers also differ. Following list

shows the production and sale in units of different segments during year 2007-2008 upto Dec'07:

Type Production 84,172 Car 1,836 Truck Bus 532 Jeep and LCVs 633 10,119 Pick up 24,857 Tractor 297,719 Motorcycle Source: Pakistan Automobile Manufacturing Association

Sale
78,759 2,006

555 469
9,674 24,930 299,063

Analysis show that in most of the segments domestic production has reached to the domestic demand. In year 2006-07 production for buses and motorcycles was greater than their sale. While production for jeeps, LCVs and tractors was less than their sale but with little differnce. Car segment showed greater differnce with production of 176,016 and sales of 180,834. Non capacity utilization of plant capacity by local automotive industry of Pakistan is not fulfilling local demands despite having capability otherwise This fact along with fast growth of this industry shows that industry is going to achieve economies of scale soon.

2. THE PORTER'S FIVE FORCES

(i) Threat of Potential New Entrants: As local auomotive industry is not capable to meet the total demand for different segments, it provides an opportunity for new entrants.Although in year 2006-07 Pakistan imported 35,721units of used cars, lesser amount than year 2005-06 of 54,618. But Government has introduced fresh incentives for new entrants to Pakistan's auto industry, which also includes tax free import of 3 to 25 cars. The auto policy envisages an investmentof Rs.0.3 billion in the next five years, to achieve a target of 0.5 millioncars per annum. So there exists threat of new entrants. (ii) Bargaining Power of Buyers: As this industry contains luxiours and high priced products and demand excedes supply so there is less bargaining power of buyers of this industry. (iii) Bargaining Power of Suppliers: Most of the companies in auto sector of Pakistan are joint ventures with foreign multinational companies and those companies provide raw material for auto industry in Pakistan where only assembling of those parts is done. So the bargaining power of suppliers does not effects directly the Pakistan auto industry. (iv) Threat of Substitute Products in Other Industries: Most of the people in Pakistan travel mainly by using their own cars or public transport 5

such as buses and vans. Although there is threat of Railway industry and PIA for auto industry but economic conditions of Pakistan and infrastructure rduces this threat to a great extent. (v) Intensity of Rivalry Among Existing Competitors: Existing conditions show that there is less competition among existing companies in auto sector of Pakistan. It is due to less capacity utilization and higher demand than supply and fast growth in the industry.

3.THE DRIVERS OF CHANGE IN THE INDUSTRY AND IMPACT THEY WILL HAVE:
Increasing demand of automobiles, auto finance leasing and changing market preffernces show that this industry will grow fast in future. Government's Auto Industry Development Plan (AIDP) also refers to heightened growth in this sector of economy. It also will cause economies of scale for the industry, but global impacts and incressing raw material costs will effect the effiency of this industry. Mostly buyers of this industry use automobiles for their own use or for earning purpose. But the recent trend shows that in future most purchases would be for personal use. In terms of technological changes and innovation this industry is far behind the other countries. Mostly the shape of vehicles is changed but the engines of old models are used. In Pakistan auto sector companies do not market their products heavily. But looking at future competition prospect their would be need for effective marketing efforts by these companies.

4. COMPANIES IN THE STRONGEST/WEAKEST POSITIONS:

I.PAK SUZUKI: Pak Suzuki emphasizes the idea of a responsible corporate citizenship thereby managing environmental, safety & occupational health matters are cosiderd as an integral part of their business. Pak Suzuki enjoys great share of market in car segment with 53% of total market as following graph shows;

11%

2% 53%

Pak Suzuki Indus Motors Honda Atlas Cars Dewan Motors

34%

Source: Pakistan & Gulf Economist

Pak Suzuki has following products; Car: 1. Suzuki Liana 1300 CC 2. Suzuki Cultus 1000 CC 3. Suzuki Alto 1000 CC 4. Suzuki Mehran 800 CC LCV: 1. Suzuki Potohar 1000 CC 4x4 Pickup: 1. Suzuki Ravi 800 CC Van: 1. Suzuki Bolan 800 CC Pak Suzuki has a wide spread dealership system which makes the availability of its products possible to a large portion of market in Pakistan. It also provides different types of services through its Customer Relations Centers. (II) INDUS MOTORS: Indus motor company is the second major player of the Pakistan auto industry, it enjoys the 34% of the market share. Its managerial strategies includes respect and corporate Image, customer satisfaction, quantity in production & sales, quality, profitability and best employer. Products of Indus Motors include; Car: 1. 2. Toyota Corolla 1300 to 2000 CC Daihatsu Coure 850 CC 7

LCV: 1. Toyota Hilux 4x2 2400 CC IMC has also strong distrbution system spread in most of the areas of the contry. It has also service centres and parts and accessories available in many parts of the country. (III) HONDA ATLAS CARS: Managerial strategy of Honda Atlas Cars emphasizes on innovation, employees satisfaction, quality, respect for all, safety and productivity. Its product line contains; Car 1. 2. Honda Civic 1493 to 1590 CC Honda City 1300 CC

Honda Atlas Cars has Dealership Network covering all of Pakistan, and Dealership are equipped with all the facilities a modern dealership should have. The facilities include Sale, Service and Spare parts. It also provides warranty services valid for 2 Years or 50,000 kilometers whichever comes first from the date vehicle is sold and is transferable.

5. KEY SUCCESS FACTORS FOR COMPETITIVE SUCCESS

Following factors contribute much to get success in this industry: 1. Joint venture with an internationally successful company 2. Availability of spare parts and accessories 3. Dealership network 4. Effective strategies to help auto financing These factors are almost equally important for all the segments of auto industry and in Pakistan prospect it seems that they will remain important for a long period of time. So in order to get competitive eadge in auto industry all companies have to give high priority to these factors.

ECONOMICS ANALYSIS
INTERNATIONAL SCENARIO Oil prices: The oil prices have significant dumpcart on the economy of any country and it also effect the Industries in the Courtiers. The oil prices is currently moving around 120/banel, which is 20 to 22 more then that before the past few months the prices of petroleum The oil prices is Currently moving around 120/barrel, which is 20 to 22 more then that before the past few months the prices of petroleum is increasing rapidly and due to 8

this increase the overall world suffered. Due to oil prices increase Pakistan economy suffered a lot, inflation reached 20% due to increase in inflation purchasing power of the people effected the oil price change is also sincerely related to the Auto industry or oil industry is negatively corral acted with auto industry, because Automotives run with oil and oil price increase, increase the operating cost of automobiles. Due to this oil price rise, the auto Industry suffered a lot. Exchange Rate: Exchange rate between two currencies is also important the exchange rates between two currencies reflect the difference b/w the inflation rate between the two countries. The exchange rate ie specially important for the companys who are dealing internationally. The change in exchange rate can affect the firms operations and prices. The Current exchange rate of rupees to dollar is 65/ which is RS 5 more to as Compare to few month back. The Euro is also replacing dollar the many Currencies as a reserve.

NATIONAL SCENARIO Monetary Policy: The monetary policy is made by the Central bank of a Country to regulate the money and money supply. State have regulates and formulate monetary Policy. The current monetary policy is tight in which the citrate bank increase the interest rate. the interest rate affect the economy or business because it discourage the bung and selling of any thing. The Auto industry is also affected by the monetary policy Todays tight monetary policy increasing the lost of auto learning which discourage the rates of automobiles. The auto industry heavily depends upon the monitory policy. Fiscal Policy: The fiscal policy is formulated by the Govt: the fiscal policy is all about the revenues and expenditures there are too types of fiscal policy. Expansionary and contractionary: Current fiscal policy is contractionary in which Govt reduces the expenditures are development the fiscal policy have significance impact on the economy and the Industries. As the current fiscal policy is contractionary the Govt reduce expenditures and due to these less expenditures the economic activities slower down and money supply is also reduce so the people have less money to Consume on the luxurious items, it reduced the sales of the automobiles. Demand and Supply Shocks: The demand/supply shock refers to a situation in which either the demand boost up or supply. The demand shock increases the price of the commodities so up and in supply shock vice versa. When Citi bank the pioneer of the Consumer banking launched consumer banking (auto leasing) there was large demand of the auto mobiles increase so much as the Monetary policy is tighten the demand of the auto mobiles reduced so much.

Political Scenario: The Pakistans politics is at worst position after the assassination of Mohtarma Benazir Bhutto, due to the violence a lot of damage done in Pakistan, and now Pakistan became the Riskier place to invest, and FDI is decreasing in Pakistan, and also the people are not going to make a purchase of the luxuries atoms like automobiles. The political condition of Pakistan is not sound, and economic activities became slower.

COMPANY OVERVIEW
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 countrys 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. Atlas management is striving to modernize company operations by adapting applicable aspects of research and theory and more specifically, Hondas unique philosophy of hard/soft technologies to the realities of Pakistani conditions. Company management structure, systems and processes are changed according to the demands of the customer, growth and new technology. Efforts are being made to develop participation at all levels of personnel in decisionmaking and a substantial and effective delegation has been established at levels where applicable. Various participation programs such as Ala Mayar Quality Circles movement, launched in 1985, are strongly encouraged to allow constructive selfexpression and teamwork. The Company training and development programs encourage all members to develop themselves and contribute to their full potential. Atlas Honda is playing a pioneering role in creating conditions for easy and confident use of motorcycles all over the country. A vast and growing network of over 1600 motorcycles sales service and spare parts dealers has been established. In order to back up this system, Atlas has set up Technical Training Centers in Karachi and Lahore which provide several courses of varying duration and complexity for 10

motorcycle mechanics and users each year. Mobile training facilities take the latest know-how, technology and maintenance of motorcycles to major rural and urban centers around the country.

FINANCIAL ANALYSIS OF ATLAS HONDA KEY RATIOS:

Ratio Gross Profit Operating Profit Net Profit Return on Assets Return on Equity Earning per Share Price-Earning Ratio Dividend Yield Times Interest Earned Current Ratio Quick Ratio Assets Turnover Fixed Asset Turnover Inventory Turnover Total Liabilities to Equity Ratio Long Term Debt to Equity Ratio Debt to Assets Ratio 2005 9.5% 6.36% 4.5% 10.3% 30.3% Rs.24.7 18.3 3.3 10.4 1.44 .64 2.3 7.5 7.1 1.9 .4 .66 2006 9.4% 6.32% 3.9% 8.87% 25.9% Rs.18.9 11.7 3.4 5.5 1.32 .33 2.3 4.8 7.5 1.9 .6 .66 2007 9.4% 5.9% 3.3% 6.88% 18.6% Rs.13.5 11.7 4.7 3.1 1.29 .52 2.1 4.6 7.6 1.7 .4 .63

Source: Atlas Honda Yearly Report 2007

GROWTH RATE:

11

2005 Sales Net Income Earning per Share Operating Expenses 42% 9.6% -21.6% 23.6%

2006 23.36% 13.3% 13.17% 18.7%

2007 -4.66% -18.2% -28.57% 9.9%

Source: Atlas Honda Yearly Report 2007

REASONS FOR CHANGE Gross Profit:

in 2007 Increase in sales by 23.37% in 2006 Sales decreased by 4.66% in 2007 2007-Year of consolidation and restructuring COGS increased by 23.59% in 06 & decreased by 4.72% Rise in raw material cost and utility cost

Operating Profit:
Operating expenses increased by 18.69% in 06 , due to competition and introduction of CG-125 deluxe Operating expense increased by 9.92% in 2007 Selling, general and administrative expenses not reduced in order to remain competitive

Net Profit:
2007 2007 projects Taxes increased by 20% in 06 & decreased 32.5% in Interest expense increased by 122.8% in 06 77.65% in Additional borrowing for capacity expansion and new

Return on Assets:
Net income increased by 13.35% in 2006 & decreased by 18.2% in 2007 Assets increased by 25.26% in 2006 Fixed assets increased by 65% Increase in plant & machinery and computer accessories because of expansion Current assets reduced by 4.6% Current saving account decreased by 72% due to increase in interest, tax and investment in fixed assets Assets increased by 5.3% in 2007 Major change is investment in Atlas income fund

12

Return on Equity:
Net income increased by 13.35% in 2006 and decreased by 18.2% in 2007 Equity increased by 40% in 2006 & 15% in 2007 Ordinary bonus shares increased from 18mn to 29mn in 2006 and to 34mn in 2007

Earning per Share:

Net income increased by 13.35% in 2006 & decreased by 18.2% in 2007 Ordinary bonus shares increased from 18mn to 29mn in 2006 and to 34mn in 2007

Price-Earning Ratio:
in 2007 Price per share declined by 27.5% in 2006 and by 28.5%

Dividend Yield:
decreased Dividend payout ratio increased while price per share

Times Interest Earned:

expense Decrease in operating profit and increase in interest

Current Ratio:
Current assets declined by 4.6% in 2006 and increased by 9.8% in 2007 while current liabilities increased by 11.4% and 12.6% in 2006 & 2007 respectively

Assets Turnover:
by 25.2% 5.3% Sales increased by 23.36% in 2006 while assets increased In 2007 sales declined by 4% whiles assets increased by

Inventory Turnover:
CoGS increased by 23.37% in 2006 while inventory increased by 29.15% In 2007 CoGS declined by 4.72% and inventory declined by 14.18% Inventory declined because of less work in process

Debt to Assets Ratio:

13

 In 2006 assets increased by 25.26%, debt by 25.13% and equity by 25.53% In 2007 assets increased by 5.3%, debt decreased by .8% and equity by 15%

PROJECTED FINANCIAL STATEMENTS: Regression Analysis for Sales:

Year 2003 2004 2005 2006 2007 GDP% 4.73% 7.5% 8.6 % 6.6% 7.0% Sales Growth% 26.31 42.576 41.94 23.36 4.66-

Source:1. Medium Term Development Framework (MTDF) 2005-10 2. Annual report of Honda Atlas a=-3.22258 b=4.23 y=-3.22258+4.23x

40.00

30.00

SALES

20.00

10.00

0.00

5.00 6.00 7.00 8.00

GDP

14

M o d e l Su m m a ry C h a n g e Sta tistics Ad ju ste d Std . Erro r o f R Sq u a re R R Sq u a re R Sq u a re th e Estim a te C h a n g e F C h an g e d f1 d f2 .3 13a .0 9 8 -.2 0 3 2 1 .0 6 8 7 7 .0 9 8 .3 2 5 1 3

M od e l 1

Sig. F C h a n g e .6 0 9

a . Pre d icto rs: (C o n sta n t), G D P

a Coefficients

M odel 1 (Constant) GDP

Unstandardized Coefficients B Std. Error -3.227 51.970 4.231 7.422

Standardized Coefficients Beta .313

t -.062 .570

Sig. .954 .609

95% Confidence Interval for B Lower Bound Upper Bound -168.619 162.165 -19.390 27.851

a. Dependent Variable: SALES

Projected GDP & Sales:

Year 2008 2009 2010 GDP % 7.0 7.8 8.2 Sales % 25.96 29.771 31.46

Source:Medium Term Development Framework (MTDF) 2005-10

Projected Income Statement

(Rupees in million) 2008 Sales Cost of sales Gross Profit 20919.94 185950.17 1969.77 2009 27148.10 24591.8 2554.98 2010 35689.70 32329.11 3358.59 15

Operating expense Operating Profit Other charges (net of other income) Profit before tax Taxation Profit after tax

731.57 1238.19 216.4 1021.8 317.8 704

949.36 1606.81 408.75 1198.06 372.6 825.46

1248.05 2112.54 570.66 1541.88 479.52 1062.35.3

Notes to Projected Income Statements: Cost of Goods Sold and Operating Profits are projected as percentage of sales Interest expense is the interest on liabilities at the beginning of year Interest rate is assumed 7% for three years on short term liabilities and 10.6% for long term debt Tax rate is 31.1% Dividend paid is 55.7%

Projected Balance Sheet

(Rupees in million)

2008 Assets Non Current Assets Property, Plant & Equipment Other non current assets Current Assets Inventory Investments and bank balances Other current assets Total Assets Equity & Liabilities Share capital Reserves

2009

2010

4523.47 101.52 2504.84 2247.75 745.55 10123.13 411.3 2809.7

5869.5 131.71

7716.22 173.14

3251.45 4274.45 2916.86 3834.59 967.44 1271.85 13136.96 17270.25 411.3 3121.6 411.3 3487.28

16

Non current liabilities Current liabilities Creditors & provisions Other current liabilities Total Equity & Liabilities

1668.7 3562.4 1671.03 10123.13

1668.7

1668.7

4623 6077.5 3312.36 5625.47 13136.96 17270.25

Notes to Projected Balance Sheets: Assets are taken as percentage of sales Share capital is assumed same for each year Retained earnings are added in reserves It is assumed that company will fund extra assets through short term liabilities

VALUATION OF ATLAS HONDA STOCK

From Dividend Model we found the price for stock of Atlas Honda which is Rs.177.92. Current market price of the share is Rs.206.65.The market price per share of the company has declined since 2005, again owing to lower demand and the need to position a little more competitively to ward off contention from the lower priced brands. In 2006-2007, the market price was higher in the beginning of the fiscal year but declined then onwards. Towards the end of 2007, the market value has increased because of less trading in the company shares.

RECOMMENDATIONS
In given circumstances sell strategy should be adopted because the market price is higher than intrinsic value of the company stock which can go down in future. If someone does not hold the shares he/she must not purchase these stocks.

17

http://www.cement.com.pk/latest-developments/107-latest-newstest2.html http://teabreak.pk/gdp-growth-rate-to-increase-to-four-percent-by-2010asian-development-bank-outlook-2-200/18379/ http://www.pc.gov.pk/MTDF%20Review%202007-08/MTR.pdf http://www.mdgmonitor.org/factsheets_00.cfm?c=PAK http://www.unescap.org/

www.unescap.org/ttdw/Publications/TIS_pubs/pub_2484/pub_2484_CH3.pdf

18