INDUS MOTORS - Analysis of Financial Statements
OVERVIEW (October 30 2009): Indus Motor Company Limited was incorporated in Pakistan as a public limited company in December 1989 and started commercial production in May 1993. The shares of the company are quoted at all the stock exchanges of Pakistan.
The company was formed in accordance with the terms of a Joint Venture agreement concluded amongst the House of Habib, Toyota Motor Corporation and Toyota Tsusho Corporation for the purpose of assembling, progressive manufacturing and marketing of the Toyota vehicles.
The company also acts as the sole distributor of the Toyota vehicles in Pakistan. The Company is also the sole distributor of DAIHATSU vehicles in Pakistan and has a license for assembling, progressive manufacturing and marketing of these vehicles in Pakistan. Indus Motors is the only company in the world to manufacture both these brands.
THE MARKET The ongoing global economic crisis, deteriorating law and order situation, and continued power shortages slowed Pakistan's real GDP growth to 2% for FY09 compared to 5.8% achieved in the prior year. Overall economic activity weakened despite growth in agriculture, while declining imports and slowing domestic demand resulted in lower tax revenue.
The large scale manufacturing sector recorded a dismal performance with a decline of -8.2% compared to 5.4% growth for the previous year. The first half of the financial year was particularly severe for the industry as inflation rose drastically while the rupee lost value against most major currencies (both dollar and yen are used in importing parts for assembling, therefore such devaluation increases the cost of goods by a large margin).
The industry also had to face challenges from government in the form of additional levies and taxes. The budget (2008-09) imposed a 5% Federal Excise Duty on cars with engine capacity of greater than 850cc. It also included imposition of fixed slabs of withholding tax. After the budget, the government also imposed a 35% cash margin on letters of credit (which was withdrawn several months later). Such policies led to a decline in production and subsequently, employee reduction. The government's decision to reduce depreciation allowance on import of used cars (from 2% to 1%), was one positive step for the automobile industry. In the new budget (2009-10), the government has eliminated the 5% FED which has translated into a stronger demand.
A tighter monetary policy led to limited availability of consumer finance. The higher interest rates did not attract consumers and demand for locally assembled vehicles dropped. Locally assembled Passenger Cars (PC) and Light Commercial Vehicles (LCV) sales dropped 47% YoY in FY09 from 187,412 units to 99,307 units. It had previously shown an annualized growth rate of 28% (2001-07). The main decline in sales was for vehicles up to 1000cc. This is the due to the fact that most affected by the slowdown of the national economy is the lower end of the market and society.
While the sales of the whole automobile industry plunged, Indus Motors was able to increase its market share from 25% (FY08) to 32% (FY09).
Sales for the CKD Passenger Car (Small-High Segment) reduced by 24% in FY09. While Indus Motors suffered a 20% decline in sale volume in this segment, it increased its market share to 69% (from 66%). Total sales of the Corolla vehicles were 26,760 units. The closest rival was Honda City with unit sales of 6,482 units.
Sales for the CKD Passenger Car (Economy Segment) reduced by around 60% in FY09. Daihatsu Coure (Indus Motors flag carrier in this segment) suffered a reduction of over 52% in sales volume though it increased its market share by 4% (from 26% to 30%).
CKD Light Commercial/Pickup Segment witnessed a plunge of 61% in sales volume. Though sales decreased by 23%, Indus Motors was able to double its market share to 45%. FY09 saw Indus Motors' sales and share in the CBU segment decline. The sales volume decreased by 59% whereas its share, though still dominant, reduced from 89% to 75%.
SPARE PARTS The spare parts segment of Indus Motors showed a healthy growth of 9% YoY, reaching Rs 1.5 billion. This segment has high possibilities which are restricted by the continued negative practices of under invoicing and smuggling. Though initiatives have been taken to reduce such acts, there is a lot to be done.
LIQUIDITY RATIOS The liquidity situation has improved consistently since FY03 when the current ratio hit a low of 1.19. Liquidity touched a high of 2.56 (FY08) before decreasing to 1.69 (FY09). From FY05 to FY06, current assets and current liabilities increased almost proportionally resulting in a small change in the current ratio (from 1.46 to 1.49). In FY07 both current assets and current liabilities decreased, though liabilities decreased by a greater amount, thus leading to an increase in the current ratio. In FY08, sales decreased due to lower demand. Large declines in both current assets and liabilities were seen, and again the decrease was far greater for current liabilities (-49% YoY).
This decrease was fueled by a drastic (-80% YoY) decrease in advances. Thus the current ratio spiked to its highest in recent history, ie 2.56. FY09 saw the current ratio fall drastically. The decrease came amid large increases in cash and bank balance (124% YoY) and stock-in-trade (55% YoY). It was mainly due to a disproportionate increase in current liabilities caused by an over 500% YoY increase in advances (from customers and dealers). This substantial increase is due to the fact that the advances in FY08 were abnormally low. This figure had decreased by over 80% YoY from around 4.5 million rupees to less than a million. The trend clearly shows that FY08 was an odd year for the company.
ASSET MANAGEMENT RATIOS
Inventory turnover has remained consistent since FY03 at around 42 days. It decreased in FY07 to 28 days due to a large decrease in stock-in-trade and stores & spares (over -25% YoY). The decline continued in FY08 (to 24 days) due to increased net sales and decreased stores & spares. Currently (FY09), the inventory turnover has slightly increased to previous levels of around 40 days on the back of large increase in stock-in-trade (55% YoY) and a lesser decrease in net sales (-8.6% YoY). The decrease in sales is not unique to Indus Motors alone.
It is currently an industry wide phenomenon which has seen sales decrease drastically. Sales of locally produced Passenger Cars (PCs) and Light Commercial Vehicles (LCVs) witnessed a YoY decrease of (-8%) in FY08 and of (-47%) in FY09. The large increase in stock-in-trade can be equated to the slowdown of the economy and the subsequent drying up of the consumer liquidity.
The sales-to-equity ratio has continued its downward trend. While sales have showed a mixed performance, increasing from FY02 to FY08 and then decreasing in FY09 (-8.59% YoY), total equity has continued to increase. It has achieved this increase without any new issues, due to increases in the company's reserves. Reserves have increased from around 850 million rupees (FY01) to around 9.5 billion rupees (FY09).
Total asset turnover had showed a consistent increase since FY02 to FY08. This showed that the sale generated by the productive capacity of the company was increasing year by year. The total asset turnover decreased in FY09 both due to a decrease in sales (-8.59% YoY) and a large increase in total assets (50% YoY). The increase in total assets came amid a slight decrease in fixed assets, mainly due to a 124% increase in cash & bank balance and a 55% increase in stock-in-trade. The ratio decreased from 3.01 (FY08) to 1.83 (FY09).
Day sales outstanding (DSO) has showed a varied performance. It increased in FY02 (20.5 days) and then decreased till FY05 (lowest of 5 days). It increased in FY06 (7.5 days) and then decreased again in FY07 (6 days). Since then it has continued to increase and is currently 16.5 days (FY09) largely because of an increase in trade debts. The recent increase can be attributed to the credit problems faced by the customers (mainly distributors due to a slowdown in demand).
DEBT MANAGEMENT RATIO
The debt to assets ratio has showed a varied performance. It increased from FY01 (49.28%) to FY03 (77.01%) and then continued to decrease till FY08 (31.36%). From FY07 to FY08 the ratio showed a decrease of 17.29%. This was due to a large decrease in debt (-43% YoY). It then increased in FY09 to 50.22%, mainly due to a large increase in debt (140% YoY). The long term debt to equity ratio decreased from FY01 (18.01%) to FY04 (1.11%) and then continued to increase to FY08 (5.64%). It then decreased to 4.89 in FY09. Whereas equity has continued to increase throughout, the main reason for the increase in this ratio since FY04 (to FY08) was due to the consistent increases in deferred taxation (1600% from FY04 to FY08).
The decrease of FY09 was also based on a slight decrease in deferred taxation (-5% YoY). The debt to equity ratio has remained consistent around 1, while the long term debt to equity has decreased to 4.89 (after touching a five year high of 5.64 in FY08) due to an increase in equity. Times interest earned ratio (TIE) has remained consistent till FY06. It increased to 97.37 (FY07) from 34.46, and then spiked in FY08. The spike took the TIE to 1284.23 (an increase of 1218% YoY). This was mainly due to a very low finance charges for that paricular year (FY08). The TIE returned to 78.09 in FY09.
The gross profit margin has remained consistent over the years. It increased from FY01 (6.83) to FY03 (13.73). Then it decreased for two years to 12.17 (FY05), then remained steady for two more years (FY05 - FY07). Since FY07 it has continued on a downward trend, touching 6.14 (FY09). The decrease in the margin has been due to the ever increasing cost of goods sold. The cost has increased hugely due to high rupee depreciation and the global oil crisis. Costs are also increased due the high inflation rate prevalent in FY09.
The net profit margin has also maintained a steady graph. Both net profit and sales increased from FY04 to FY07, the margin remained consistent. Since FY07, the margin has decreased due to decreasing operating profit and operating income. The net profit decreased from around 2.7 billion rupees to around 1.4 billion rupees. In FY09, the margin decreased due to heavy increase in administrative expenses (16% YoY). The return on common equity (ROE) decreased consistently from FY06. It was due to decreasing net profit amid increasing equity. Equity has continued to increase throughout due to continuous additions to the general reserve.
We can understand that the decrease in net profit was greater than the increase in equity. The ROE touched 13.49 (FY09) from 42.32 (FY06). The return on asset (ROA) had increased until FY08, after which it decreased in FY09 (6.70). The ROA's decrease can be attributed to an increase in total assets (50% YoY for FY09). Though this decrease can be translated as a failure on part of the assets to perform, we know that the decrease in returns is due to an industry wide slowdown of demand. The sales of Passenger Cars and Light Commercial Vehicles have decreased by over 47% in FY09.
The company's book value has increased consistently over the years. Currently it stands at Rs 131 with a YoY increase of 9.1%. This increase is due to the high increase in reserves. Reserves have continued to increase while no new shares have been issued. This continuous increase has shown that the stockholders are well catered to and their share in the business has continued to increase. This also shows that the management is taking good care of the stockholders interests. Earnings per share (EPS) for the company had also showed continuous increase from FY01 (2.59) to FY07 (34.93). Onwards, the EPS has continued to decrease due to decreasing profits (). Profits have decreased on the back of decreasing demand in the market.
The decrease in demand can be attributed to many factors. These factors include increasing inflation, the subsequent drying up of liquidity, decreased available consumer finance, and some government regulations (namely increased sales tax and withholding tax). Dividend per share had increased from FY03 (7) to FY07 (13); and since has decreased to 10 (FY09). This too has been due to the decreasing profits for the company. The price to earnings ratio (P/E) has showed variance. It was 3.19 in FY02, from whence it decreased to 2.81 (FY03). Then onwards the P/E ratio increased to 8.68 in FY08, after which it decreased to 7.80 (FY09).
The market price of the company's share was 14.65 (simple average ) in FY02. The price then increased consistently till FY07 when it was 261.63 (simple average). It decreased to 253.03 in FY08, and then plunged down after the collapse of the stock market. At the end of FY09, the market price of the company's share was 107.72, while the average for FY09 became 137.37 (a YoY decrease of around -46%).
The future of the automobile industry in Pakistan, at least the near future is not very bright. Consumer finance is dried up due to high interest rates and increasing NPLs. Continued inflation has also decreased savings and thus the buying power of the consumer. But as always, there is a distinct ray of hope. The economy is picking up the pace. The large middle class will in time want more cars and the demand will pick up. At the moment, the sector faces threats from many angles. Internationally, Pakistan's automobile market is being looked as more and more favorable; therefore many new companies are planning to expand here.
This increased competition poses a threat to the existing companies including Indus Motors. Also, the automobile sector is already under review with the Competition Commission of Pakistan (CCP) for alleged cartelization. Moreover a withholding tax of 5% was imposed on locally assembled cars (FY08). High prices of petroleum products (due to surcharges and levies) have also contributed to decreased demand of automobiles.
But a recent step to decrease depreciation allowance for import of used cars from 2% to 1% is seen widely as a positive step as it reduces the number of vehicles imported thus giving a boost to the local industry. The budget of 2009-10 also brings good news for the industry. The federal excise duty (FED) of 5% has been discarded. For Indus Motors, the future is brighter than that of the overall sector. Its sales are consistent, while that of others decreased. In 2008 it sold more than it produced. Even though new competition from Proton and other carmakers threaten the industry, Indus Motors looks safe with its market share.
As a corporation, Indus Motors is making greater profits. It continues to be a reliable investment and has seen its share price increase dramatically over the years, though that has decreased recently. Indus Motors continues to strive to become a good corporate citizen. It has regularly undertaken social initiatives regarding road safety, environment, technical education, etc. It takes care of all its stakeholders.
COURTESY: Economics and Finance Department, Institute of Business Administration, Karachi, prepared this analytical report for Business Recorder.
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