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After selecting the topic, the next challenge for me was to choose the organization on
which I am going to base my research work. I again started brainstorming and came up
with many well known organizations, having large operations, but in Pakistan. After
gathering data and relevant information I ended with three business sectors,
Automobile industry, textile industry and tobacco industry. I choose best companies in
their respective class, but after applying hindsight I decided to go with Automobile
industry and the organization I selected was ´  

µ.

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Indus Motor Company (IMC) is a joint venture between the House of Habib, Toyota
Motor Corporation Japan (TMC), Daihatsu Motor Company Ltd vehicles in Pakistan
through its dealership network. The company was incorporated in Pakistan as a public
limited company in December 1989 and started commercial production in May 1993.
The shares of company are quoted on the stock exchanges of Pakistan. Toyota Motor
Corporation and Toyota Tsusho Corporation have 25 % stake in the company equity.
IMC·s production facilities are located at Port Bin Qasim Industrial Zone near Karachi
in an area measuring over 105 acres. Indus Motor Company·s plant is the only
manufacturing site in the world where both Toyota and Daihatsu brands are being
manufactured. IMC·s Product line includes 6 variants of the newly introduced Toyota
Corolla, Toyota Hilux Single Cabin 4×2 and 4 versions of Daihatsu Cuore.

 
IMC·s Mission is reflected in our Company·s Slogan ACT #1 Action, Commitment and
Teamwork to become #1 in Pakistan. The Indus Team is committed to ACT so that it
achieves the #1 position in the Auto Industry in: Respect & Corporate Image Quality &
Safety Customer Satisfaction Production & Sales.
a 

 
´To be the most respected and successful enterprise, delighting customers with a wide
range of products and solutions in the automobile industry with the best people and the
best technologyµ
Customer satisfaction

 

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1.c ‘ollowing our ´Customer firstµ philosophy in manufacturing and providing
high quality vehicles and services that meet the needs of Pakistani customers.
2.c Enhancing the quality an reach of our 3S Dealership Network
3.c Employing customer insight and feedback for continuous corporate renewal,
including producer development, improving service and customer care

  à     
1.c Maximizing QRD (Quality, Reliability and Durability) by built-in-engineering,
2.c Transferring Technology and promoting Indigenization at IMC and Vendor.
3.c Raising the bar I all corporate functions to meet Toyota Global Standards.

V  !  " ! 


#$c ‘ostering a Kaizen culture and mindset at IMC, its Dealers an Vendors.
%$c Implementing Toyota Production System
&$c Removing waste in all areas and operating in the lowest cost quartile of the
industry.

 
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1.c M/s A.K. Brohi & Company
2.c M/s Mansoor Ahmed Khan & Co.
3.c M/s Mahmud & Co.
4.c M/s Sayeed & Sayeed Co.
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c

The main objectives and aims of this project are to analyze and evaluate the overall
performance of the company by applying different conceptual models and Discusses
the liquidity, cash flow situation and produce informative report usable by the users of
the statements assessing the financial position, performance and adaptability of the
organization. The performance evaluation is based on historic and current available
data about the operations of the company. Under the constantly increasing competition
in the business market, these analyses portray a very clear and informative picture to
the investors, shareholders, regulators and other players in the stock market. ‘inally the
project draws conclusions based on my analysis about the current situation and the
prospects of the Indus Motor Company Limited.

%"

   


c

Different analytical approaches are employed to assess the financial position and
performance of the organization to justify the set aims and objectives. It requires a
sound knowledge of financial ratios and their interpretation, business performance
measurement models, trend analysis, conclusions and making recommendations. To
obtain these objectives I applied my knowledge gained from my M.com studies and
have developed the appropriate skills required to do this research project.

‘or discussions and comparison I have gathered the last five years ‘inancial Data but I
calculate three years ‘ 06, ‘ 07 and ‘ 08. Using the figures from the financial
statements I have also made a trend analysis of these key indicators over the past years.
To have a wide and broader picture of the analysis I have also compared the figure of
Indus Motor Company Limited with its direct competitor which is Honda Atlas Cars
(Pakistan) Limited. ‘inally I have drawn conclusions of my overall findings and have
given some recommendations for better performance in future period.cI have done my
research in a more rational and simple order and have discussed the matters one by one
in order to make things more clear and understandable. Moreover I have used graphical
representation to make my research report more effective.
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p %**+ p %**, p %**- p %**. p %**/

Net Sales 37864604 414,23,843 390,61,226 352,36,535 276,01,034

C.G.S 35540418 375,75,356 346,20,632 310,88,905 248,94,856

G.P 2324186 38,48,487 44,40,594 41,47,629 27,06,178

  469985 487,373 509,986 404,917 294,304


Distribution Cost

Admin exp 352249 297,284 265,302 242,456 277,653

822234 784,657 775,288 647,373 571,957

#/*#+/% &*0.&0,&* &.0./0&*. &/0**0%/. %#0&10%%#


Other Operating 156479 306,193 348,430 321,746 186,614
exp

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Other Operating 727080 786,834 956,494 10,21,212 449,443
Income

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‘inance Cost 26540 2,760 43,889 126,945 94,093


E.B.I.T %*1.*#& &/01#0-## 1%0%+01,# 1*0-%0--- %&0*%0+/-
Taxation 660911 12,50,866 14,83,780 14,24,313 818,311
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Current assets of the Indus Motor Company Limited are mainly comprised of the
inventory, cash, loans & advances and other receivables as there had been no debtors
for the company as its sales are on cash basis.

In ‘ 2005 Current assets were 111,78 but In ‘ 06 current assets were Rs.14, 096
(million) which decreased in ‘ 07 to Rs.13, 536(million) and kept decreasing and in
‘ 08 these were Rs.9, 665(million). The reason is that other receivables have decreased
as previous outstanding debts have been recovered and also the cash and bank balance
has reduced. The company was facing cash deficits and therefore accelerated its
recovery of receivables but still the company seems to be in liquidity problems. But in
2009 current assets were 16,715 which is higher than any other year and it shows that
company is now in strong position.

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A measure of the degree to which current assets divided by current liabilities is called
current ratio. A high ratio indicates a good probability the enterprise can retire current
debts. A ratio of 2.0 or higher is a comfortable financial position for most enterprises.

A stringent test that indicates if a firm has enough short-term assets to cover its
immediate liabilities, without selling its inventory. The acid-test ratio is far more
strenuous than the current ratio, primarily because the current ratio allows for the
inclusion of inventory assets.

As Indus Motor is a manufacturing concern so it has more of inventories in its


stock. In ‘ 05 the ratio was 1.46 and In ‘ 06 the ratio was 1.49 but in ‘ 07 the ratio
increases to 1.82 times which is a well managed position. In ‘ 08 the figure has
improved more and is 2.55 which show Indus Motor·s strong position. While the Acid
test ratio in ‘ 06, the ratio was 1.07 rising to 1.44 in ‘ 07 and further rising to 1.85 in
‘ 08. The Reason for such improvement is that although current assets has reduced but
current liabilities has reduced more as compared to current assets which caused to
improve the current ratio. As the current ratio is above 2 thus it indicates over
capitalization in working capital which is due to huge piling of inventories by the
company. This indicates that the company is struggling in its working capital
management and sharp decrease in cash balance warns that this may lead company to a
cash deficit situation. The Current assets have reduced by about 31% and current
liabilities have reduced by about 60% in ‘ 08 as compared to ‘ 06. Reason for
reduction in current assets is mainly because of other receivables of Indus Motor which
have reduced by more than 94% since ‘ 06, and current liabilities reduced mainly
because of lower advances from customers and dealers which have reduced by about
85% since ‘ 06. But in 2009 it current ratio was 1.69 which was a negative and the main
cause of reduction in current ratio was decrease in Sales volume. If we compared Indus
with Honda than Indus is in a strong position because in ‘ 09 current ratio of Honda
was only 1.1
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Indus Motor does not show a drastic fluctuation in Gross Profit Margin. In ‘ 06, the gross
profit margin was 11.77% when Pakistan economy has witnessed huge demand for cars mainly
due to easy leasing terms offered by the banks in Pakistan. In ‘ 07 Gross profit reached to
11.36%, decrease was due to fall in Car·s Demand in Pakistan mainly because of Interest rate
increase and strict revised leasing policies of Banks. Inflation also had some affects on it.
Inflation in ‘ 06 was 7.89 which increased to 10.27 in ‘ 07.

In ‘ 08 GP margin was low. The reason was high inflation and currency fluctuation. Pak rupee
depreciated 8.5% against Japanese yen to 1¥ = Rs 0.561 (average price) in 9mths'08 from 1¥ =Rs
0.517 (average price) in the same period last year, causing the input cost to increase beyond
expectation.

In ‘ 2009 G.P decrease to its minimum level than before (6.14%). The main reason of decrease
the G.P margin is due to unstable environment of the country and due to increase in terrorism
activities.

Whereas Honda Atlas had significant affect on its Gross Profit Margin and even in ‘ 07
it decreased to about 1%, compared to ‘ 06 and ‘ 08, in which margin was about 4%.

The net profit ratio is net profit expressed as a percentage of total sales. Net profit is taken
before tax and other indirect costs.

Indus Motor Company Limited had net profit ratio of 3.66% in ‘ 09 which was the
lowest in the four years as it was above 7% in last two reported financial years. In ‘ 07 all
operating expenses i.e. administration, distribution and others increased by about 16%
compared to previous year, finance cost decreased by about 65% and the Taxation Charges had
increased by about 4%. In ‘ 09 Company made a profit of 3.66%. One of the most important
factor was that the company·s other income has decreased by about 18%. This performance
indicator exhibits that company is struggling to maintain its profitability during the period of
global and domestic economic recession and high inflation pressures. A similar picture exhibits
Honda Atlas, a competitor,
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Which has continuously decreasing profit margins as the net profit ratios of Honda
Atlas are 2.75, 1.55 and .51 for the year ending 06, 07 and 08 respectively?

The reasons for lower profitability of Indus Motor and the auto sector in general,
are the falling demand of cars, (especially decline in purchasing power of the middle-
income group of the population) due to high inflation. Also, tightening of monetary
policy and resulting interest rates also hit the demand for cars along with raising the
finance costs for the companies. Banks became more prudent, after they were hit by
huge losses in their car financing portfolios. Thus, the car financing facilities offered by
the banks were restricted and made stringent.
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Return on Capital Employed or ROCE is a ratio that indicates the efficiency and
profitability of a company's capital investments. In other words the ROCE ratio is an
indicator of how well a company is utilizing capital to generate revenue. ROCE should
normally be higher than the rate that the company borrows at; otherwise any increase
in borrowings will reduce shareholders' earnings.

A measure of the net income that a firm is able to earn as a percent of stockholders
investment Return on Equity (ROE) is one measure of how efficiently a company uses
its assets to produce earnings. Many analysts consider ROE the single most important
financial ratio applying to stockholders and the best measure of performance by a firm's
management. ‘ 06 showed outstanding figures of return earned against the capital
employed which reached up to 41.52% clearly showing the efficient usage of capital
resources. In ‘ 07 a year of disappointment, where ROCE decreased by about 20% the
statistics shows that PAIT figure has not changed significantly but the capital employed
has increased by about 29% in ‘ 07. In ‘ 08 ROCE has again reduced by about 31%
and this time the fall is again due to capital employed, which has increased in this year
by about 21%. The company need to reschedule and improve its financing policies and
must control the costs and other expenses to attain better profits in order to get to the
better return on the capital employed. Indus Motor Company Limited again has a
decreasing trend in the returns with respect to the shareholder·s equity. In ‘ 06 it was
42.32% falling to 34.13% in ‘ 07 and even further dropping to 24.27% in ‘ 08. And this
reduction in ROCE and ROE continue in ‘ 09.
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Honda Atlas·s ROE figure is not as good as Indus Motor·s. In ‘ 06 ROE is 26.07%, and
worsened in the next year i.e. ‘ 07 and is -10.83% while improved marginally in ‘ 08
at a level of 2.32%.

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Indus Motor maintains a very low amount of trade debtors and is well managed. In
‘ 06 debtors collection period was only 6 days and remained same next year i.e. ‘ 07
but in ‘ 08 it increased and is 9 days and in ‘ 09 increased by 1 day. Whereas Honda
Atlas, the direct competitor, it does not maintain any trade debtors.

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Inventory turnover reflects how frequently a company flushes inventory from its
system within a given financial reporting period. The measure can be computed for
any type of inventory³materials and supplies used in manufacturing or service
delivery, work in progress (WIP), finished products, or all inventory combined.
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The figures are better as compared to the competitors despite Honda Atlas has an
improved since ‘ 06 to ‘ 08, which is 62, 59 and 42, in ‘ 06, ‘ 07 and ‘ 08
respectively, but not as efficient like Indus Motor which has reduced its days from 47
days in ‘ 06 to only 26 days in ‘ 08. The company has improved its position by
reducing the inventory turnover period continuously. The company seems to pursue a
policy of reducing its inventory level and to bring it in line with the sale demand. This
should be a good policy as it should reduce the unnecessary tied up investment in
inventories and to pursue a better treasury management but in ‘ 09 inventory period
increases very high (49 days) that show a worst year for Indus Motor.

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Indus Motor Company Limited had upwards trend in its share price till ‘ 07 where its
share·s price was at its peak, at level of Rs.305.5/share. In ‘ 07 it had a tremendous
increase in the value. But in ‘ 09 it drops to 192.03 And like others, Toyota was also
not safe from the effects of the policies of import, and its share price too declined in the
reporting ‘ 08, and dropped down to Rs.200.05.

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The portion of a company's profit allocated to each outstanding share of common
stock. Earnings per share serve as an indicator of a company's profitability.

EPS of Indus Motor has changed over the period in the same fashion as its profitability.
In ‘ 06 EPS was PKR 33.7 as compared Honda Atlas, a competitor, EPS of PKR 9.88. In
the year 2008 Indus Motor reported a low EPS of 29.15, whereas Honda Atlas has a very
low EPS of 0.55 in ‘ 08. And in ‘ 09 EPS was 17.62 but still higher than Honda. 29.15

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The dividends paid by the company for the ‘ 06 were Rs.12.00 per share represented
35.61% dividend Payout. In ‘ 07 it increased to Rs.13.00 per share. Indus Motor
maintains a dividend policy of dividend payout between 30 to 40%. The Dividend per
share in ‘ 08 was Rs.10.50 in ‘ 08 because of relatively low earning per share but the
dividend payout ratio remained in the same range. Due to drop in Earning per share
and Dividend per share in ‘ 08 and ‘ 09, the market value of Indus Motor has also
fallen.

‘ormula:- Dividend payout ratio = Dividend per share / Market price per share

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‘rom the hindsight analysis of Indus Motor Company Limited it is evident that the profitability
of the company is satisfactory while net profit and gross profit margins are too much extent
maintained. There are some problems that the company needs to address with its adequate
decision making. The Company needs to take appropriate steps to deal with the changing
business and regulatory scenario by improving their organizational policies and managing costs
of production and overhead expenses to improve the profitability of company. Company also
needs to device ways to increase sales in order to run its production to its maximum optimal
capacity in order to achieve economies of scale. The liquidity position especially the liquid cash
availability is to be ensured by the company as currently it does not seem sufficient and
adequate. In the ‘ 08, except for sale revenue all the other performance indicators including
profitability, liquidity, gearing, sale volume, working capital and market capitalization
exhibited a low as compared to previous reported financial years. It is worth mentioning that
the significant reasons for these adverse movements were external factors like adverse foreign
exchange rate movements, high inflation and fall in overall demand of cars due to recession in
economy of Pakistan which has affected the company·s business. Gearing conditions over three
years is showing an increasing trend and no new share issue has been witnessed.

Good profitability over past years as compared to other competitors especially Honda Atlas has
resulted in a better share price than other companies in the automobile industry in Pakistan.
The increased P/E ratio shows that there are potential of increased earnings in the future and
exhibits strong investor confidence. A high Interest cover ratio along with low financial gearing
shows that the company can raise debt capital as a source of finance with ease when needed. It
is advisable for the company that it restructures its capital base with revised gearing as a geared
company is privileged with comparatively low weighted average cost of capital.

The performance of the car assemblers remained lackluster owing to the economic meltdown in
the country. In the wake of rising steel prices, appreciation of yen against the rupee and
imposition of 5% ‘ED in the budget, the car assemblers passed the increase of cost to the
consumers. The increase in car prices weakened the demand for cars. Also, high interest rates
and reduction in car financing facility offered by banks further depressed the demand for cars.
Thus, the industry car sales went down to only 147,441 units sold in ‘ 08. Sales went down
mainly in the 800cc and 1000cc (economy car segment) categories, which contribute 60% to the
total auto sales. Other macroeconomic factors, such as depreciation of Pak rupee against the US
dollar and Japanese yen, higher steel prices, the imposition of 5% ‘ederal Excise Duty on cars,
above 850cc, imposition of Withholding Tax at the registration stage, and additional regulatory
duty of 50% on high-end vehicles, increased the cost of production and hampered the
profitability of the auto companies.
a 1
The market share of Pak Suzuki declined to 62% in ‘ 08. Dewan Motor's market share also
decreased to 5% in ‘ 08. However, Indus Motor and Honda Atlas gained in terms of market
share. Honda Atlas's market share increased to 7% in ‘ 08. Indus Motor Company performed
better than the other companies in the auto sector and its market share was 26% in ‘ 08. This
company managed to widen its market share largely due to the successful launch of new model
of Corolla.

It is forecasted that the demand of new cars in Pakistan shall increase in years to come as a
potential demand for 2012 is at 500,000 units which currently in ‘ 08 is 164,710.

The Pakistan Association of Auto Parts and Accessories Manufacturers (PAAPAM) and
Pakistan Automobile Manufacturers Association (PAMA) in a joint presentation have suggested
various steps that should be taken by the government to arrest the slowdown in sales. The two
associations appealed to the government to withdraw the 5 per cent excise duty on cars and
impose a ban on import of used parts instead of allowing their import after imposing 30 per
cent redemption duty.

Observers say that much will depend on the prices of the cars as the nominal rate of growth of
the local auto industry has primarily been blamed on sharp increases in prices in the past. On
their part, the manufacturers have blamed numerous devaluation and sharp increases in the
cost of inputs such as power, gas and petroleum and particularly heavy taxation for the sharp
price increases.

The auto industry is currently faced with a number of problems. However, in the future, gross
margins can be expected to improve as future results may depict positive impact of lower steel
prices and stabilization of the exchange rate. Another positive aspect for the auto sector to
consider is that a revival in auto sales have been witnessed in the last few months of ‘ 09 as
June car sales were up by 6 percent on month-on-month basis - the fourth consecutive growth
on monthly basis. Indus and PSMC posted growth of 8% and 7% respectively. The demand for
cars is expected to pick up after the first signal of monetary easing in April 2009 when the
discount rate was cut from 15% to 14%. Declining interest rate in the economy is a promising
sign for the future sales of the sector. Also, the elimination of 5% ‘ED in the Budget 2009-10 will
provide a relief to the auto sector. This would reduce the price of cars and thus help raise
demand to a certain extent.