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Analytical Skill PDF
Analytical Skill PDF
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 one’s performance.
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.
As it is a listed Company at all the Stock Exchanges of thecountry, easy access to the F/S
was another reason to choose.
Research Questions:
How will I utilize my time in order to complete my project within time? 4
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 macro-environment
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.
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 Company’s office seeking to arrange a meeting
with the management. I managed to obtain an appointment for meeting with the Company’s
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 macro-environment surrounding such as
Government’s 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 analyst’s reports and watched business channels to get a ‘walk
through’ of the general status of the industry and the Company and general state of country’s
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 I’ve 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. 6
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 ACCA’s 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.
Ratio Analysis:
It’s 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:
Limitations:
SWOT Analysis:
Advantages:
Limitations:
PEST Analysis:
8
It’s a tool for analysing a business and, in particular understanding market growth or decline.
(Chapman, 2011)
Advantages:
Limitations:
It’s 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:
Limitations:
It implies suppliers, buyers and competitors are threats whereas strategies could be
made by collaboration.
It claims to assess industry’s profitability while Company specific factors are more
important.
It implies that five forces equally apply to all competitors in the industry whereas
forces may differ from business to business.(Tiwari, 2009)
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.
Profitability Analysis
10
Profitability Ratios
HACPL TOYOTA
2011 2010 2009 2011 2010 2009
%
Gross
Profit 0.90 -1.51 1.25 6.63 8.08 6.14
Margin
Net
Profit -1.35 -5.38 -2.84 4.45 5.73 3.66
Margin
ROCE -4.42 -16.10 -9.23 28.73 42.44 20.13
-4
GP
-6
NP
-8
ROCE
-10
-12
-14
-16
-18
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%.
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). HACPL’s
management were unable to predict the economic recession and enhanced production 11
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,’ HACPL’s main product was at its decline along with intense competition from the
major assembler’s 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 Atlas’s 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).
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:
12
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 product’s 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, customer’s 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.
10
13
8
HACPL
4
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. Toyota’s 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.
NP Margin:
14
FY 09:
The NP ratio reduced dramatically to -2.84% as compared to the last year’s 0.5%.
FY 10:
NP declined to -5.38%.
FY 11:
15
NP rose by 65% to -1.35%.
2
HACPL
TOYOTA
0
2009 2010 2011
-2
-4
-6
Competitor Comparison
Toyota’s strong performance in GPs cushioned it from inflated prices and preserved the
NP ratios. Toyota’s profits on bank deposits were grander than HACPL’s due to stronger
cash position. Unlike HACPL, Toyota kept its currency risk low by entering foreign
exchange 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:
16
FY 09:
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.’
FY 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:
Consequently, ROCE became better but the persisted negative figure still presented
poor utilization of resources.
50
17
40
30
20
TOYOTA
HACPL
10
0
2009 2010 2011
-10
-20
Competitor Comparison
Toyota remained profitable and ungeared and has been earning much higher returns on
CE than HACPL thus, much better ROCE.
LIQUIDITY ANALYSIS
18
Liquidity Ratios
HACPL TOYOTA
2011 2010 2009 2011 2010 2009
times
Current 0.67 0.62 0.70 1.84 1.67 1.69
Ratio
Quick 0.26 0.21 0.17 1.38 1.31 1.28
Ratio
0.8
0.7
0.6
0.5
0.2
0.1
0
2009 2010 2011
FY 09:
CR was 0.70 times, even riskier compared to last year’s 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 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. 19
FY 10:
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 good’s 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:
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 Company’s liquidity throughout these years has been risky indicating cash-flow
difficulties. However, ‘credit payment’ support from holding Company on CKD supplies
to some extent was a comfort. (Honda Atlas Cars (Pakistan) Limited, 2011f)
2
20
1.8
1.6
1.4
0.4
0.2
0
2009 2010 2011
Competitor Comparison
Toyota maintained almost twice the CA than CL by having high cash & bank and stock levels due
to high market share than HACPL. Whereas HACPL’s CA have been lesser than CL due to much
lower cash and bank and stock levels than Toyota’s. Unlike HACPL, Toyota did not rely on short-
term borrowings.
Therefore Toyota’s current and quick ratios have been much superior to HACPL’s.
SOLVENCY ANALYSIS
21
Solvency Ratios
HACPL TOYOTA
2011 2010 2009 2011 2010 2009
Gearing
Ratio 19.90 40.29 34.66 0.00 0.00 0.00
(%)
Interest
Cover -0.61 -1.17 -1.79 88.77 53.50 78.02
(times)
45
40
35
30
25
Gearing
20
Interest Cover
15
10
0
2009 2010 2011
-5
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 purpose of capital investments
abruptly increased the gearing and discomforted the shareholders by increasing the
financial risk.
FY 10:
22
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:
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.
23
45
40
35
30
25
HACPL
20
TOYOTA
15
10
0
2009 2010 2011
Competitor Comparison
Toyota’s 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.
Interest Cover:
24
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:
Although Company’s 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 couldn’t 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.
100
25
90
80
70
60
50 HACPL
40 TOYOTA
30
20
10
Competitor Comparison
As Toyota remained un-geared its FC has been much lesser than HACPL’s consisting only
of mark up on advances from the customers and the bank charges. Earning delightful
OP, Toyota’s Interest Cover has been exceptionally well than HACPL’s over these
periods.
EFFICIENCY ANALYSIS
26
Efficiency Ratios
HACPL TOYOTA
2011 2010 2009 2011 2010 2009
Days
Payable 7 5 10 6 9 7
Days
Inventory 58 53 77 36 34 42
Days
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
Company’s 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.
FY 10:
27
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 HACPL’s 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:
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. Company’s revived financial performance and Cash position
earned it extended credit period.
12
10
6 HACPL
TOYOTA
4
0
2009 2010 2011
Competitor Comparison
Inventory Days:
28
FY 09:
There was a huge increase in finished good’s stock due to steep fall in ‘Honda City’ sales
representing slowdown in trading due to the model’s decline stage and economic fall
down.
FY 10:
There was a vast decrease in finished good’s 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:
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).
90
29
80
70
60
50
HACPL
40
TOYOTA
30
20
10
0
2009 2010 2011
Competitor Comparison
Due to higher sales and thus higher inventory turnover than HACPL, Toyota’s inventory
days remained better than HACPL’s over these years displaying better WC performance
by Toyota than HACPL.
INVESTORS ANALYSIS
30
Investor's Ratios
HACPL TOYOTA
2011 2010 2009 2011 2010 2009
20
15
10
EPS
Share Price
5
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 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. 31
50
40
30
HACPL
20
TOYOTA
10
0
2009 2010 2011
-10
Competitor Comparison
Toyota with healthy profits generated attractive EPS in all three years of 17.62, 43.81
and 34.90/share respectively while HACPL’s losses produced negative EPS.
P/E Ratio:
32
FY 09:
MP of HACPL’s shares fell to PKR 12 from PKR 44 last year. The P/E ratio became -4.27
times compared to last year’s 83.02 times.
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, investor’s 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
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 investor’s trust and share price and P/E ratio thus fell.
8
33
6
2
HACPL
TOYOTA
0
2009 2010 2011
-2
-4
-6
Competitor Comparison
Toyota’s profits over these years and payment of dividends kept investor’s trust and
thus MP high. Together with Toyota’s attractive EPS, its P/E has been much better than
HACPL’s.
SWOT ANALYSIS
34
STRENGHTS: WEAKNESSES:
Strong brand loyalty and smart Higher car pricesacting adversely on
marketshare. market share.(Daily Times, 2011)
ISO 9001(QMS) and EMS certified and Capacity underutilization creating high
therefore maximum quality focused fixed costs.
and environmental friendly. Inefficient costs management.
Providing greatest passenger safety Not providing smaller cars that have
through ABS, SRS & G-CON technology the maximum demand. (Pak Top 10,
and fuel efficient cars via i-VTEC 2011a)
technology. Reliance on borrowings and therefore
Countrywide sales, services and spare high FC.
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.
PEST ANALYSIS
35
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 country’s 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 country’s 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) means shortages of educated and capable workforce resulting in high training costs but
cheap labour availability.
TECHNOLOGICAL:
36
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 Pakistan’s 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.
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.
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 competitor’s 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 quality products. Therefore threat is low.
These are the factors that indicate position of suppliers of the industry.
37
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 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 customer’s 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.
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.
HACPL holds a major share in Pakistan’s automotive sector. However, its performance in recent
years remained lacklustre.
Company’s profitability has been frail for the recent years as the recession attacked economy.
Devastating floods further eroded the situation. Company’s production capacity enhancement
prior to these events led to underutilization and therefore higher fixed costs. Company’s 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 Company’s
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, Toyota’s 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 short-term 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. Company’s tensed financial performance
kept its credit period tight. Adequate level of inventory has not been maintained as well.
Toyota’s inventory management has been fine due to high sales.
Investor’s 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 investor’s confidence high.
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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 competitor’s substitute
products and imported used cars.
The External environment has to be looked upon too. Government’s 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 supplier’s 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 customer’s power. Therefore I think the sector
has challenging future. However, much is dependent on successor government that follows
after 2013 elections.
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Recommendations:
I would recommend that HACPL should: