ATLAS HONDA PAKISTAN LIMITED Analysis of Financial Statements Financial Year 2007-1HFY'10

OVERVIEW (January 18, 2011) : Atlas Honda Limited is a joint venture between the Atlas Group and Honda Motor Co., Japan. The company was created by the merger of Panjdarya Limited and Atlas Autos Ltd in 1988. Both these motorcycle manufacturing concerns were established by the Atlas Group. In addition, a third concern, Atlas Epak Ltd. was taken over by the Government of Bangladesh. Atlas Honda Limited manufactures and markets Honda motorcycles in collaboration with Honda Motor Company. The Company also manufactures various hi-tech components in-house in collaboration with leading parts manufacturers like Showa Atsumitech, Nippon Denso and Toyo Denso. Honda motorcycles are by far the largest selling motorcycles in the country with an unmatched reputation for high quality, reliability and after-sales-service. Atlas has undertaken to develop local manufacturing capabilities to the highest, economically feasible level. While a major role in localization has been assigned to vendor industries, Atlas has the country's largest in-house manufacturing capability at its Karachi and Sheikhupura plants. To support the production facilities, the company has established an R&D wing and tool making facilities through CDA & CAM which are growing rapidly in size and function as the company expands. Atlas has managed to execute 14 Joint Venture/Technical Assistance Agreements between local vendors and foreign manufacturers for transfer of technology. Besides, Atlas has directly executed 5 Joint Venture/Technical Assistance Agreements other than Honda. In addition, the company also launched a new model of CD 100 Euro-2 in the year 2009, launched a new model of CG 125 Deluxe Euro-2 and acquired ISO 14001-2004 Environment Certificate. Recent results (1H10) Despite the floods, the agricultural income withstood some of the shock due to higher produce prices. This, along with government support, supported the demand for two-wheelers. Sales increased by 34% to be Rs 15.46 billion for the six-month period due to both volume growth and product mix. GPM showed a slight improvement of 20 basis points to be 7.4%. However, adverse forex movement along with inflationary pressures that pushed the administrative and distribution costs upwards, threatened to deteriorate the net profit margin. However, the substantial 40% increase in the other income to Rs 156 million bolstered the profitability figures.

PAT has shown an increase of 40% to be Rs 431 million as compared to Rs 308 million in the same period last year. EPS of Rs 6.9 was achieved as compared to Rs 4.93 in the same period last year. Motorcycle industry Over all, the industry sold 1.2 million bikes in 2010 as opposed to 850,000 units the year before. After witnessing a deceleration in motorcycles sales growth last year, the year under review witnesses growth in motorcycle sales. Most of it attributed to a hike in petrol and prices of 4 wheelers which made motorcycles more attractive for the common man. In addition, water shortages and escalating steel prices are putting the present momentum very challenging to operate in. Especially those players who are indulging in sales tax evasion, smuggling and under invoicing are making it very hard for the formal sector to achieve its target and hit economies of scale which are critical for exports. The motorcycle sector however, experienced an overall growth in sales of 44 percent over the last year. Production The financial year 2010 witnessed an unprecedented increase in material process internationally coupled with an unfavorable exchange rate and jump in the commodity process locally. Atlas Honda, however, was able to absorb most of the cost impact by focusing on improved efficiency and process optimization. Due to this Atlas Honda sold 483,028 units this year as against 359,525 units last year. Sales performance Atlas Honda maintained its market leadership position in this challenging scenario. In spite of a challenging environment prevailing during this period, automotive sector, on the whole, maintained positive outlook. The installed capacities in almost all the sub-sectors have continued to increase indicating a strong commitment on part of the strategic investors to the country and the long term prospects of the industry. There was an overall increase in production and sales of motorcycles throughout the country for all motorcycles assemblers and makers. In 2009, production and sales stood at (Prod: 509,054 and Sale: 507,924) and in 2010 we have seen these numbers increase by 44% (Prod: 736,861 and Sale: 737,759). The major tool to fight the price escalation effect has been to improve efficiency in serving the customer through an all encompassing approach of Sales, Service and Spare Parts. The company has continued to establish Smart Sales Point which will improve accessibility, efficient service and ready sales of parts. Another challenge faced by the company is to compete with low quality, smuggled, and counterfeit parts which are rampant all over the country and are readily available.

Profitability The cost of goods sold has shown a stark increase of 84% from Rs 12.7 billion to Rs 23.5 billion. In tandem, total revenue also grew 85% from Rs 13.7 billion in FY09 to Rs 25.5 billion in FY10, the highest turnover the company has witnessed. Administrative expenses increased by 60% from Rs 165 million in FY09 to Rs 264 million in FY10. However, selling and distribution expenses took an even higher jump of 155% as compared to only increasing by 1% in the previous year. This increase was experienced due to greater integration with dealer network. The company has now expanded its dealership network from only 300 dealers in FY09 to 330 dealers in FY10 to improve accessibility and efficient service. A considerable increase was also witnessed in Atlas Honda's Operating Profit (EBIT) for FY10 as it increased by 97% from Rs 604 million in 2009 to Rs 1,189 million in 2010. Bottom line figure has also shown a robust increase vis--vis all the other increases. Net income after taxes has jumped 217% standing at Rs 712 million as compared to Rs 224 million in FY09. Liquidity The liquidity of the company improved this year as the current ratio increased from being 1.25 in 2009 to 1.49 in 2010. The quick ratio of the company also has increased from 0.56 in FY09 to 0.93 FY10. In order to increase its current and quick ratio further, the company needs to use its resources in more efficient manner to produce more cost-effectively. Debt management The debt to asset ratio has decreased from 56% in 2009 to 54% in 2010 Debt to equity has shown a slight decrease standing at 1.19 as opposed to 1.25 in FY10. It would be favourable if Atlas Honda tried to reduce this ratio further. This implies an efficient debt management by the company. However, its financial charges have experienced a fall of 55% from Rs 251 million in FY09 to Rs 112 million in FY10. Overall, the low ratios indicate proficient use of debt by the company and signal a better solvency picture. Also, the TIE ratio has improved indicating that it has become easier for the company to make its future payments in 2010 (10.6X) as compared to how it was in 2009 (2.4X). Cash position has significantly improved as well, a 158% rise shows that much cash is available, however, excess cash should be put to speedy use in viable projects. Overall the performance of the company with respect to debt management has increased. Asset management ratios

Atlas Honda follows a policy of managing its assets in a consistent manner. The Day Sales Outstanding ratio has not improved much during this period but has dropped from 7 days in FY09 to 5 days in FY10. Efficient collection of receivables will help the company provide the needed cash to retire its debt and pay it interest charges. The operating cycle in 2010 has decreased and stands at 36 days as opposed to 55 days in 2009. This may be attributed to the better demand in the recent period that resulted in higher sales and inventory. The inventory turnover days has dropped 48 in 2009 to 31 in 2010. The total asset turnover has doubled over the previous year indicating that assets were managed and utilized in a more productive manner in the year 2010. The sale to equity ratio has also shown and increase and it improved from 4.12 in the fiscal year 2009 to 6.56 in the fiscal year 2010, showing the company is more able to make use of its Total Stockholders' Equity to generate sales Overall, Atlas Honda's performance with respect to asset management has increased in the year 2010 as compared to the year 2009. Market value Atlas Honda has been a consistent distributor of dividends every year. The board of directors of the company has proposed a cash dividend of Rs 5 per share (50%) for the financial year, thus the dividend paid per share has increased from the previous year as the last year the company paid a cash dividend of Rs 3 per share (30%). Owing to the dividend policy and a good performance of the company this year, the market price per share has increased significantly to Rs 142.5 in March 2010 from Rs 88 in March 2009 Future outlook The company believes in seeing a sustained growth in agriculture, manufacturing and service sector which will all indirectly bode well for the motorcycle industry. If foreign exchange reserves increase on the back of imports contraction coupled with continue strong remittances, the company for sees another year packed with growth and unprecedented sales revenue. Honda is no doubt the market leader with respect to motorcycle sales with 65% of production and sales belonging to Atlas Honda. However, with continued electricity shortages, water disruption, deteriorating law and order situation, rising inflation and depreciating Pakistan Rupee the motorcycle industry is in desperate need to revamp its focus and try to achieve economies of scale for exports. With respect to increased efficiency and cost reduction, Honda atlas has introduced in house and local manufacturing of high tech machine accessories and fixtures. Tool regrinding shop has been initiated to utilize dead stock and utilize unused items. The company also aims to continue with process automation at the Frame Assembly Line. Steps such as Modification of outdated dies, refurbishment of old dies local manufacturing of

local dies and High pressure Die Casting are all aiding in alleviating cost and improve manufacturing timeline. The company is viciously eyeing on Re-fixing safety levels, reducing lot sizes and decreasing lead time to improve inventory management. Given the current Economic Fundamentals of the economy marked by high domestic inflation, weakening rupee, rising interest rates, the overall politico-economic situation, the next year will be a challenging one. Historically the company has come through such critical situations successfully. Since the margins will remain under pressure, the emphasis would be on improving the manpower productivity and cost reduction, thus showing good results.

Income Statement (Rs '000)

Jun'07

================================== Total Revenue 16,608,413 20,8 Cost of Goods Sold 15,044,640 19 General & Administrative Expenses 209,261 227,7 Selling and Distribution Expenses 371,569 267,4 Operating Profit (EBIT) 1,072,852 1,2 Financial Charges 269,337 252 Net Income After Taxes 553,591 --------------------------------------------------Balance Sheet (Rs '000) Jun'07 J --------------------------------------------------Stores & Spares 407,730 417 Stock in Trade 1,580,925 1,862 Cash & Bank Balances 919,623 Total Current Assets 4,364,786 5,2 Total Non Current Assets 3,671,859 3 Total Assets 8,036,645 8,704 Total Current Liabilities 3,392,100 4,03 Total Non Current Liabilities 1,668,754 1, Total Liabilities 5,060,854 5,300,4 Paid Up Capital 411,291 472,9 Total Equity 2,975,821 3,404,1 --------------------------------------------------LIQUIDITY RATIO Jun'07 Jun --------------------------------------------------Current Ratio 1.29 1.31 --------------------------------------------------ASSET MANAGEMENT Jun'07 --------------------------------------------------Inventory Turnover(Days) 43.7 Day Sales Outstanding (Days 6.12 Operating Cycle (Days) 49.82 Total Asset turnover 2.07 2 Sales/Equity 5.58 6.13 --------------------------------------------------EBT MANAGEMENT Jun'07 --------------------------------------------------Debt to Asset(%) 63 61 ebt/Equity (Times) 1.7 1.56 Times Interest Earned (Time 3.98 Long Term Debt to Equity(%) 56 --------------------------------------------------PROFITABILITY (%) Jun'07 Ju --------------------------------------------------Gross Profit Margin 9.42% 7. Net Profit Margin 3.33% 3.40 Return on Asset 6.89% 8.0 Return on Common 18.60% 2 Equity (Aft. Tax) --------------------------------------------------PER SHARE Jun'07 Jun'0 --------------------------------------------------Earning per share 19.92 14. Price earning ratio 11.1 14.1 Dividend per share 8.5 6.5 Book value 72.35 71.9 ==================================

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