History Of Honda Atlas Cars Ltd

Published Date: 02 Nov 2017

Formulate an understanding of the automobile industry in Pakistan.

Understand the role sources of information play in formulating credible research.

Address the ethical problems faced.

Use analysis to compare and analyze the results of HAC.

Understand the importance and conduct a business analysis of HAC.

Reasons for choosing this topic:

After much thought I have decided to undertake the RAP using topic 8 "An analysis and evaluation of the business and financial performance of an organization over a three year period"

It is vital for an accountant to be able to understand the entity and work with it according to its need. To further my skills in this field I have chosen this topic so that my skills for working in the corporate sector are up to the mark.

Another reason for me choosing this topic is that it is something I have been familiar with for quite some time. It is a topic covered in the ACCA syllabus and was also part of my previous studies. However I wish to add that even thought I have studied it previously it was necessary to practically apply these skills so that I could get some firsthand experience in this field.

Company Selection

The company I have selected for this thesis is "Honda Atlas Cars Ltd". For me this was not a choice as I have always had a keen interest in automobiles and I wish to one day work in the automobile industry.

Another reason why I selected Honda Atlas was because I wanted to work on a company out of which I could get the best understanding. Due to this reason it was imperative that I go for something that would prove to be a challenge and looking at Honda Atlas’s financial statements it seemed to be the right choice.

History of Honda Atlas Cars Ltd

HAC came into existence as a joint venture between Honda Motor Company Limited Japan and the Atlas Group of Companies Pakistan in 1992.

The first car rolled off the assembly line in 1994. The company has sold more than 200 000 cars since then and is a household name in Pakistan. Throughout the period it has operated in Pakistan Honda has maintained its promise of providing outstanding service to its clients and due to that has always made its presence felt in the automobile industry of Pakistan.

The company is currently listed on the Karachi, Lahore & Islamabad Stock Exchanges. (http://www.honda.com.pk/pakistan/index.html, 2013)

Product Range:

Accord – Luxurious. Made for the elite.

City – Beautiful Design, great mileage, status symbol.

Civic – Elegant Sedan. Powerful and turns heads.

CR V – The standard SUV.

(http://www.honda.com.pk/cars/index.html, 2013)

Automobile Industry of Pakistan

Pakistan being a developing country does not play host to the largest industries yet the Automobile industry has developed rapidly over the years and played a role in the economic condition of the country itself.

To safeguard the interests of this specific industry the Ministry of Commerce has set up Pakistan’s Automotive Manufacturers Association. It plays a central role in making policies and regulating them. One of its main objectives is to help the Pakistani automobile industry in becoming a global player. (http://www.pama.org.pk/news-events, 2013)

In 2011-12 the automobile sector has shown a slight decline in production 0.84% to be exact although overall the manufacturing sector witnessed a positive growth (Economic Survey of Pakistan: Manufacturing section, 2011-12). Even though it is alarming that production has declined, it is by such a small % that it can be easily be attributed to the current socio political situation in the country with hope of an increase once things settle down.

A larger problem the automobile industry faces in Pakistan is that it lacks competition as there are only a handful of big players who pretty much rule the market. Due to this reason it is almost impossible for a new entrant into this market. The consumers can only choose from a handful of products and since all three companies ( Pak Suzuki, Indus Motor Company and Honda Atlas Cars ) make cars with different price ranges it is almost no choice at all.

Without healthy competition the market operates at low productivity as the flaws present in them are never creased out perfectly. This is made even worse because of the high import duties present in the country which negate the possibility of importing cars for most consumers since the per capita income in Pakistan is quite low.

To conclude this industry analysis, I believe that Pakistan’s automobile industry operates below par due to the lack of competition as well as the high import duties which restrict import. Thus, working within Pakistan these companies may manage to make profits but the industry as a whole can’t be considered healthy, forming only a 4.61% (Economic Survey of Pakistan: Manufacturing section, 2011-12).

Automobile Industry Growth

(http://www.pama.org.pk/statistical-information/historical-information/annual-sales-production, n.d.)

It can be seen from the above graph that the production and sales of cars in Pakistan as a whole has seen a constant increase. The highest increase being registered in FY 11/12.

The amount of cars sold have exceeded the production in all years except 10/11 which was a bad year for the automobile industry due to the floods and power outages in Pakistan.

FY 11/12 has seen quite a high increase in both production and sale of cars and shows that the industry is striving to grow even with the constant setbacks it is facing due to the socio political situation in Pakistan.

Framework of the Report

I have tried my best to adhere to the format mentioned in the OBU BSc pack while writing this thesis.

At the very start I have stated my research aim and objectives. Next, in accordance with the OBU BSc pack, I have started with describing the company, why I chose it and moved on to explaining the industry as a whole.

The next section deals with the sources of information and also covers the limitation of gathering it. The last section covers the financial and business analysis in which detailed ratio analysis has been done thru the help of a spreadsheet.

I have also provided recommendations as to what I have deduced to be the right course of action for HAC.

Information Gathering:

Part 2

WORD COUNT:1336

Types of Research

There are two types of researches used in formulating the RAP i.e. Primary and Secondary research.

Primary research, also known as field research, is conducted having maximum contact with the people themselves. Data is gathered thru interviews or questionnaires.

Secondary research is using the work of another individual which is considered credible and to be used as data in formulating a report. This covers a majority portion of the RAP. Specific sources include the internet, trade journals, surveys etc. (Borrington, Stimpson, 2006)

Both quantitative and qualitative data are found in either one of these research types.

Sources of Information

Below are defined the sources specifically used in the RAP. It is put to great emphasis that a majority of these were received in a very raw form and had to be fully analyzed before they could be used in the RAP.

Search Engines and Encyclopedias

I think it can be safely said that everything I have researched and put into this RAP has been looked up on the internet at least once. Although I used all the search engine giants such as Google and Wikipedia but often the data I found could not be used. The reason for this being that the data was not verifiable and could have been considered fake and because of this I had to let go of a lot of data that could have been part of this RAP.

I have put emphasis on this area specifically because I believe gathering information is the most important part of making an RAP.

Honda Atlas Cars Website

Since I was working on HAC it is obvious that a lot of the information has been derived from their website. The best part being that this data could be cited easily and could be considered credible enough to use in this RAP.

Other Web pages

Some other websites I considered while gathering data were the Karachi Stock Exchange website (www.kse.com.pk), PAMA website (www.pama.org.pk) and the business recorder website (www.brecorder.com).

I used the KSE site to find out more about the listed automobile companies in Pakistan. PAMA was an obvious choice as it regulates the automobile industry in Pakistan and has lots of information available in the form of statistics.

Lastly the business recorder served as an online newspaper which I used to scout articles of relevance. It could be considered a credible source as it is widely known and is read by quite a lot of people. The best part of using this source was that, since it was online, I could very easily access and retrieve information from it.

ACCA text books

The information I learnt thru studying for my ACCA exams was heavily used within this RAP and thus the relevant study texts have been cited where necessary.

Specific books which were of more importance than others include F7,P2,P3 etc.

Other Sources

A lot of the data gathered was from places which I could not directly cite in the RAP itself but this doesn’t mean that I can negate it’s value.

These were majorly people who were somehow associated with the automobile industry in Pakistan. Their contribution helped me understand where I was going wrong and where I could further improve myself.

The news also played a very important role as I made a habit of watching the business section every day so that I could derive any useful information from it.

Other than that my project mentor was a source of constant guidance and kept pushing me towards working in the right direction. I can’t thank him enough for the effort he put into guiding me thru all this.

Limitations of Information Gathering

The process of gathering data is not an easy one and while doing research one often comes across sources which would be useful however they can’t be cited properly and thus are useless at best. To avoid plagiarism such sources have been removed completely.

A majority of the research has been conducted thru online sources the main reason being that there were not a lot of books/journals/articles available covering specific areas of the automobile industry in Pakistan. It seems that there isn’t a lot of things to say about this industry as the media appears to be awfully quiet about it. Since the research is majorly online, a major problem I faced was that the websites were not updated regularly and so either the time lag increased between when I could continue writing or I had to look for a completely different source.

I also tried to contact people working in HAC currently but they made it very clear that no confidential information could be given out as it was a very sensitive matter. Due to this I found it very difficult to understand what I could or could not use out of what I did receive as I did not wish to be unethical about it.

Ethical Considerations

While working on this RAP I have tried my best to consider any and every ethical problem which may have arisen while gathering data.

To counter these ethical dilemmas I have taken extra precautions when citing sources. Making sure that the information was either public or if not I have taken the consent of the original owners.

To give credit to those whose work I have used I have cited sources, using the Harvard Referencing System, so that there may be no chance of plagiarism at all.

I have, I believe, remained objective and independent all thru the formulation of this RAP and I had no bias towards either company.

Financial Techniques Used

Ratio Analysis

"Ratio analysis is useful because it allows you to see if two figures have moved consistently with one another. You should be concerned if they haven’t." (Student Accountant, Dec 2009)

"Ratio analysis is a more sophisticated technique for analyzing financial statements. Ratios are used to assess the financial performance of a company by comparing the calculated figures to various other sources, this may be to previous year’s ratios of the same company, to the ratios of a similar rival company, to the industry, or even the economy to judge the performance of the company." (Kaplan Financial Limited, 2010, p.231)

Limitations of Ratio Analysis

Some of the limitations of using ratio analysis while conducting competitor analysis are:

Since industry averages are largely unavailable in Pakistan. The calculated ratios can only be compared with each other without a specific benchmark in mind.

Differences in accounting policies/practices can often result in a biased comparison.

The difference of the market shares held by each company may result in a one sided analysis.

Ratio analysis is conducted on past performance and may or may not be a indicator of how well a company will run in the future.

Costs and Income needs to be expressed quantitatively before they can be used to calculate ratios.

Business Analysis Techniques

SWOT Analysis

To conduct a business analysis of HAC, I have used the SWOT model singularly. The SWOT model is used to consider the external and internal factors surrounding the company. It is simple and easily understandable which is why I have used it.

"SWOT analysis summarizes the key issues from the business environment and the strategic capability of an organization that are most likely to impact on strategy development" – JS&W. (BPP P3 Business Analysis, 2010)

The reason for conducting a business analysis is to be aware of things which are not represented in the financial statements. These are things which can’t be quantified at present and can be one off events or recurring. Business Analysis is imperative for any organization which wishes to prevent Black Swan events from occurring.

Limitations in SWOT Analysis

SWOT can only help us understand the factors. It can’t make the decision for us. Thus without good interpretation a strong SWOT analysis may go to waste.

There may be some confusion in understanding SWOT completely as a single factor may be strength and a weakness all at once.

Financial and Business Analysis: Part 3

WORD COUNT:4214

Financial Analysis

With the absence of industry averages it is difficult to ascertain what the benchmark should be for these ratios thus it has been assumed that the higher ratio is closer to the benchmark where relevant.

Gross Profit Margin

"A financial metric used to assess a firm's financial health by revealing the proportion of money left over from revenues after accounting for the cost of goods sold." http://www.investopedia.com/terms/g/gross_profit_margin.asp, n.d.).

Looking at the above graph it is clear that IMC has fared much better than HAC over this three year period as far as the Gross Profit margin is concerned. The difference between the two companies margins is tremendous. HAC seems to be barely scrapping thru and even has a negative margin in 2010 and 2012.

Over this three year period HACs margin seems to have gotten worse. It can be seen to have gone back up slightly in 2010 but things seem to have worsened for the company in the final year.

In contrast to HAC, IMC has maintained a healthy margin over all three years although in 2011 it is seen to have gone down a bit but is seen to go back up in 2012.

For a company to maintain a healthy Gross Profit margin it must be able to keep its cost of sales in check at all times. This ratio also depends on whether the company is able to mark up its sales conveniently and for that matter make enough sales to cover its costs.

In HACs case it is very clear why their GP margin is seen to have fallen. The reason is falling sales and costs increasing consistently disproportionately. One of the main reasons for this is the consistent depreciating PKR against the Yen and Dollar in particular (Business Recorder, 2012). The positive margin in 2011 can be attributed to Hondas advertising campaign resulting in higher sales. "FY11 reports the highest jump of 39 percent in the sales" (Business Recorder, 2012)

Net Profit Margin

"A ratio of profitability calculated as net income divided by revenues, or net profits divided by sales. It measures how much out of every dollar of sales a company actually keeps in earnings."http://www.investopedia.com/terms/p/profitmargin.asp#axzz1tm8fIm8B, n.d.)

This ratio further elaborates the condition both of these companies currently are in and it seems that HAC is in a very dire position. On the other hand IMC has shown a much better trend with only a slight variation in 2011. 2010 seems to have been a very good year for IMC since it "doubled its profit" (The Express Tribune, 2010).

HAC is facing such a low Net Profit Margin because of a number of reasons. The first and foremost being that it already has a negative gross profit margin. Secondly the additional finance costs only up the loss for HAC. Lastly it also seems to have written off a large operating loss in 2012, this loss was written off in other years as well but in 2012 it was more than 3 times that of what it was in 2011 thus explaining the slightly lower negative margin in 2011.

The finance costs in 2011 and 2012 were lower than what they were in 2010 and this can be seen to be a positive sign since the company is currently writing off previous losses. Because of this reason it is likely that, with time, this ratio will improve.

Asset Turnover

"Asset turnover measures a firm's efficiency at using its assets in generating sales or revenue - the higher the number the better." (http://www.investopedia.com/terms/a/assetturnover.asp#axzz1tjxhooQw, .n.d)

HACs asset turnover ratio is seen to be stable over the three year period. With the absence of comparable figures it is very difficult to analyze whether this is up to industry standard or not.

As compared to IMC HACs ratio is lower. It can be seen that IMCs ratio has improved consistently over the three year period. HACs ratio has improved from 2010 to 2011 but the growth has not been up to the mark. In 2012 it is seen to go back down.

The main reason for this variance is an increase in sales from 2010 to 2011 of 39% and in 2012 the same reason is causing the decrease. The sales have decreased in 2012 by 32%.

This ratio shows that although HAC has the ability to use its assets in a good way it is not exactly trustable since the ratio seems to be going up and down consistently. This may indicate to the investors, combining the other financial metric, that this company is a risky investment which may or may not be able to use its assets efficiently.

Current Ratio

"The ratio is mainly used to give an idea of the company's ability to pay back its short-term liabilities (debt and payables) with its short-term assets (cash, inventory, receivables)." (http://www.investopedia.com/terms/c/currentratio.asp#axzz1tjxhooQw, n.d.)

The current ratio for HAC is seen to be stable over the three year period. For IMC however the final year figures are higher. For the purpose of analysis it has been assumed that a good current ratio is in the range of 1.5:1 and 2:1 as no industry averages were available.

Honda has had a constant current ratio which is sadly not up to par. It is apparent that the company has problems with current liabilities and may have serious liquidity problem if its lenders/suppliers take the hard route. In contrast IMC has maintained a much better current ratio. It has managed its current assets well to cover its immediate liabilities however it seems that in the final year they have lost control of current assets and they have gone above ideal levels although they are not far from what it should be.

HAC needs to make sure that it covers itself for its current liabilities because not only is this ratio very important for a healthy company but a lot of investors especially lenders and suppliers take it into consideration before providing capital.

Quick Ratio

"A stricter test of liquidity is the quick ratio which excludes inventory/stock as a current asset. A relatively high quick ratio indicates conservative management and the ability to satisfy short-term obligations." (Student Accountant, 2007)

For the purpose of analysis a quick ratio of 1 has been considered to be ideal.

It is clear from the chart that IMC has a much better quick ratio over this period. HAC seems to be barely scrapping thru with close to zero figures and gives a very alarming picture.

It was apparent from the current ratio that HACs quick ratio could not have been too good but this is even worse. It seems that half of HACs current ratio was due to inventory which if it is unable to sell it will not be able to pay off its immediate liabilities. Inventory as to total current assets was 60%, 66% and 61% in 2010, 2011 and 2012 respectively.

The above is evidence of the fact that HAC is not able to pay off its current liabilities without selling inventory. This can be a very disappointing indicator for current equity and debt holders and would not be very beneficial for the company when it is seeking to raise capital or if things go really bad then trying to get more supplies on better credit terms.

Inventory Turnover (Days)

"This is a ratio showing how many times a company's inventory is sold and replaced over a period." (http://www.investopedia.com/terms/i/inventoryturnover.asp#axzz1tjxhooQw, n.d.)

With the absence of industry averages it can’t be completely analyzed whether these ratios are good or bad. This has been a major problem specifically for this ratio as this varies from industry to industry.

However looking at the overall trend for both companies it can be seen that each year a slight rise in inventory days is registered which means that every year these companies find it more difficult to turn its stock into sales. This can be primarily attributed to the low per capita income and constant inflation in Pakistan which reduces the buying power of the people in turn affecting sales for these companies. (Dawn, 2012)

HAC has the higher inventory days the difference being of a staggering 24 days on average which means that HAC has a much more difficult time in converting inventory to sales as compared to IMC. With a rising trend this is quite alarming for the company since it relies on its inventory to pay off its current liabilities as determined previously.

HAC must strive to improve this at least until it is able to finance its current liabilities thru other current assets because otherwise it could result in serious cash flow problems for the company as a result of a lender/supplier boycott.

Interest Cover