Vehicles: INDUS MOTOR COMPANY LIMITED - Analysis of Financial Statements Financial Year 2005 - Financial Year 2010

OVERVIEW (October 13 2010): Indus Motor Company Limited is an assembler, manufacturer and marketer of Toyota vehicles in Pakistan since July 01, 1990. The company is engaged in sole distributorship of Toyota and Daihatsu Motor Company Ltd's vehicles in Pakistan through its dealership network. IMC is a joint venture between the House of Habib, Toyota Motor Corporation Japan (TMC), and Toyota Tsusho Corporation Japan (TTC). Indus Motor Company was incorporated in Pakistan in 1989 and is listed on all the three stock exchanges of the country. The company has a market share of 41%, following Pak Suzuki (market share: 46%). Thus Indus Motor Company is one of the two leading car manufacturers in Pakistan. The market share of Pak Suzuki declined to 46% in FY10 from 48% in FY09. Dewan Motor's market share also decreased from 0.38% in FY09 to 0% in FY10. However, Indus Motor and Honda Atlas gained in terms of market share. Honda Atlas' market share increased from 12.22% in FY09 to 12.49% in FY10 Indus Motor Company performed better than the other companies in the auto sector during FY10. The market share of Indus Motor surged from 39% in FY09 to 41% in FY10. The company managed to widen its market share.
================================== Income Statement ================================== 2009 Rs '000 ================================== Net Sales 37,864,604 60, Cost of sales 35,540,418 55 Gross Profit 2,324,186 4,7 Distribution Costs 469,985 Administration expenses 352,249 Operating Profit 1,501,952 3 Other Operating Expenses 156,47 1,345,473 3,444,6 Other Operating Income 727,080 EBIT 2,072,553 5,246 Financial charges 26,540 --------------------------------------------------Other charges --------------------------------------------------Worker's Profit Participation Fund --------------------------------------------------Worker's Welfare Fund --------------------------------------------------Profit before Taxation 2,046,013 Taxation 660,911 1,79 Profit After Taxation 1,385,102 ==================================

Auto industry that witnessed a 67% decrease in volume over the last couple of years bounced back in FY10 with Indus Motor, in particular outperforming the industry average. The automotive industry proved to be a key driver for the large-scale manufacturing sector that recorded a growth of 4.7% compared to 8.2% decline in the previous year. In 2009-10, the industry demand for the locally manufactured Passenger Cars (PC) and Light Commercial Vehicles (LCV) grew by 43% to 141,654 units as compared to 99,310 units in 2008-09. The overall production increased by 37% to 138,587 units versus 101,400 units in the corresponding period of 2008-09. RECENT RESULTS - FINANCIAL YEAR 2010 As compared to FY09, the net sales for FY10 rose by 37%. This was due to increase in manufacturing and trading for the company. The increase in demand is mainly attributable to the combined effects of a healthy agricultural income

for the farming community and a small increase in auto financing. This has occurred on a low volume base for the previous year, which had suffered from the dampened demand due to the extraordinarily difficult economic conditions in the country and also from the absence of the newly launched Corolla for part of the year on account of the run out of the old model. The Federal Budget 2009-10 brought good news for the auto industry in terms of the abolishment of the 5% excise duty on cars with an engine capacity in excess of 850cc, which was immediately passed to the customers through a price decline. The cost of sales for the period is also 35.93% higher, which is due to higher volume. However, overall, the gross profit had a two-fold increase. With respect to the distribution costs, there was only a slight decline whereas the administrative expenses increased by around 8%. This was mainly due to the rise in salaries, allowances and other benefits as well as staff training costs. Other operating expenses rose by 62% mainly because of increase in workers' welfare fund, which increased from 41 million to 112 million. Workers' profit participation fund rose from 108 to 281 million in FY10. On the other hand, operating income rose by 60% because of a rise in return on bank deposits from 628 million to 1611 million. Also the liabilities no longer payable were written back which increased from 16 million in FY09 to 97 million in FY10. The finance costs for the company decreased by more than six-fold. Although the mark-up on advances from customers rose from around 8 million to 77 million, there was also a simultaneous increase in unrealised gain on revaluation of foreign exchange contracts from 3 million to 96 million, causing an overall decrease in finance costs for the company. Thus, the overall result for the company was an increase in profit after tax of around 60% from 2046 million to 5242 million in FY09. PROFITABILITY Gross profit margins fell drastically from 11.37% in FY07 to 9.29% during FY08. The gross profit margin of the company decreased due to 13% lower gross profit earned during FY08 as compared to that posted in FY07. The sales revenue of the company had increased by 6%, however, there was a more than proportionate (8.5%) increase in cost of sales. During FY08, Indus Motor Company, along with the overall auto sector, suffered largely due to appreciation in Japanese yen against the Pak rupee and higher steel prices. The net profit margin of the company also decreased during FY08 due to 16.6% lower profit after tax posted by the company. The administrative expenses had increased by 12% in FY08. Also, the other operating income fell by 17.7% due to due to low returns on bank deposits. Finance charges for the company had decreased by 94% during FY08, as the company did not have any markup bearing long-term liabilities, except deferred taxation, in its balance sheet. During FY08, return on asset ratio of the company fell to 16.6% after having risen to 17.5% in FY07. The ROA fell despite a 12% decline in assets. Lower profit after tax for the period translated into lower ROA and a sharp decline in Return on Equity (ROE) for the period. FY10 was a better year for the company in terms of its profitability. After a constant decline in return on equity since the last 4 years, ROCE increased to 27.3% after a mere 13% in FY09. This was basically due to an impressive increase in the net income for the company in FY10 due to aforementioned reasons. Gross profit margins, net profit margin and return on asset slightly increased in FY10 from FY09 position although the return on asset is still lower than FY08 position. This is due to a substantial increase in assets for the company specially stock in trade and cash balance. The total assets have increased by more than 100% from FY08 to FY10. DEBT MANAGEMENTThe debt-asset ratio decreased from 48.65% in FY07 to 31.36% in FY08 mainly because of lower current liabilities. The debt/asset ratio increased to 41.67% during the latest quarter that ended on the 30th September 2008. This was due to the rise in trade and other payables from Rs 2.7 billion at the end of June 30th, 2008 to Rs 4 billion at the end of the 1Q09. Times Interest Earned (TIE) reached a phenomenal level of 1284.23 in FY08 because of extremely low-level of financial charges as they reached a low of Rs 2.7 million. This was mainly because of the gain on revaluation of foreign exchange contracts, which amounted to around Rs 20.8 million. In FY09 and FY10 the debt to asset ratio for the company reached 50% and 53% respectively. This is mainly due to increase in advances from customers and dealers from Rs 985 million in FY08 to Rs 5926 million in FY09 and Rs 8076 million in FY10.

The time interest earned, henceforth, has declined for the company in FY09 and FY10 from 194 in FY08 to 78 in FY09 and 52 in FY10. In FY10, the interest charges are Rs 99 million as compared to 18 million in FY08. ASSET MANAGEMENT The inventory turnover has seen a mixed trend in the past 5 years. In FY09, it increased from FY08 position from 24 days to 40 days. In FY10, it was again 31 days. This implies that Indus Motor reduced the level of inventory in FY10. Alongside, the day sales outstanding has also decreased from 16.51 in FY09 to 9.66 in FY10 due to better credit policies. This resulted in an overall decline in operating cycle in number of days from 56 days in FY09 to 41 days in FY10. The sales to equity improved in FY10 due to 37% increase in net sales for the company. Total Asset turnover also increased from 1.8 in FY09 to 2.2 in FY10 due to the same reason. LIQUIDITYThe liquidity position of the company had been steadily increasing over the years until FY08. During FY04 and FY05, the main reason for a more comfortable liquidity position was decline in current liabilities. During FY06, the current liabilities increased by 23%, however, the assets increased by 26%. In FY07, the current assets declined but there was a more than proportionate decrease in current liabilities. The liquidity of the company improved further during FY08. The current assets of the company decreased by 28.6% however, the short-term liabilities decreased more in proportion. IMC's advances from customers and dealers decreased by 78% while interest payable and trade payable also dropped. The liquid assets of the company like cash and bank balances and receivables and prepayments decreased but it is not alarming and the company is in a comfortable liquidity position. However, in FY09 the liquidity position worsened. Although, there was an increase in current assets due to stock in trade, trade debt and cash and bank balances from Rs 9664 million to Rs 16715 million, there was a more than proportionate increase in current liabilities from Rs 3779 million to Rs 9884 million in FY09 mainly due to increase in advances from customers and dealers. The liquidity position didn't improve in FY10 as the current assets and current liabilities increased proportionately. The current ratio declined only slightly from 1.69 to 1.67. FUTURE OUTLOOK The auto industry is currently faced with a number of problems. There is increased competition from imported cars and importantly used cars. This is threatening the future domestic sales in the country. The inflationary pressure and unfavourable economic conditions are decreasing the purchasing power of the middle-income population and thus hampering demand. Furthermore, the industry faces tremendous pressure from the government to reduce the prices of locally manufactured cars, against a backdrop of the depreciating Pak rupee and increasing raw material costs. To top them all, the catastrophic floods that hit the country in July, the worst natural disaster in Pakistan's history, has added to the much woes of the nation. With over 20 million people affected and colossal damage to standing crops and infrastructure, the current state of the economy is simply not capable of withstanding the shock. Not only do the consequences on the government budgetary estimates for 2010-11 appear severe, all forecasts including GDP growth rates will need to be scaled down due to risk of a higher fiscal deficit, which in turn will lead to increased government borrowing. The domestic auto industry has barely recovered from the fallout of the global economic crises which means that the above mentioned circumstances is not a positive sign for the company. Also, recently, the government has signed the Afghan Transit Trade Agreement and unless the safeguards agreed therein are implemented strictly, this could adversely affect local trade, and especially spare parts business.

INDUS MOTORS-FINANCIALS ================================== Income Statement (Rs '000) Jun'01 ================================== Total Revenue 9,054,730 8 Cost of Goods Sold 8,436,008 General & Administrative Expenses 232 Selling and Distribution Expenses 0 Operating Profit (EBIT) 437,006 Financial Charges 67,594 Net Income Before Taxes 338,91 Net Income After Taxes 203,370 --------------------------------------------------Balance Sheet (Rs '000) Jun'01 --------------------------------------------------Stores & Spares 68,184 Stock in Trade 1,275,500 1 Cash & Bank Balances 94,404 Total Current Assets 2,043,723 Total Non Current Assets 1,181,82 Total Assets 3,225,552 6, Total Current Liabilities 1,295,045 Total Non Current Liabilities 294,623 Total Liabilities 1,589,668 4,3 Paid Up Capital 786,000 7 Total Equity 1,635,884 1,8 --------------------------------------------------LIQUIDITY RATIO Jun'01 --------------------------------------------------Current Ratio 1.58 1 --------------------------------------------------ASSET MANAGEMENT Jun'0 --------------------------------------------------Inventory Turnover(Days) 53.42 Day Sales Outstanding (Days) 15.3 Operating Cycle (Days) 68.77 Total Asset turnover 2.81 Sales/Equity 5.54 4. --------------------------------------------------DEBT MANAGEMENT Jun'0 --------------------------------------------------Debt to Asset(%) 49.28 Long Term Debt to Equity(%) 9.21 Debt/Equity (Times) 0.97 Times Interest Earned (Times) 6.61 --------------------------------------------------PROFITABILITY (%) Jun'01 --------------------------------------------------Gross Profit Margin 6.83 Net Profit Margin 2.25 4 Return on Asset 6.30 Return on Common Equity 12.43 --------------------------------------------------PER SHARE Jun'01 J --------------------------------------------------Earning per share 2.59 Price earning ratio 4.33 Dividend per share 1.5 Book value 22.31 25 ==================================

COURTESY: Economics and Finance Department, Institute of Business Administration, Karachi, prepared this analytical report for Business Recorder. DISCLAIMER: No reliance should be placed on the [above information] by any one for making any financial, investment and business decision. The [above information] is general in nature and has not been prepared for any specific decision making process. [The newspaper] has not independently verified all of the [above information] and has relied on sources that have been deemed reliable in the past. Accordingly, the newspaper or any its staff or sources of information do not bear any liability or responsibility of any consequences for decisions or actions based on the [above information].
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