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Honda Atlas Cars (Pakistan) Limited (HCAR) is one of the most preferred stocks that retail and high-networth individuals are interested in. It's a major part of the overall automobile assembler sector on the Pakistan Stock Exchange (PSX). The sector comprises companies that assemble cars, trucks, and motorcycles in Pakistan. The fiscal year 2022 and the two quarters of 2023 were particularly challenging to the entire sector, and giants like INDU and HCAR felt its effects. The import ban and several other macroeconomic conditions increased car and motorcycle prices. But the price hike did not result in profitable sales. In this report, we will look at how HCAR performed and what to expect from this stock in the future.

In a Nutshell

• Analyst Background

• Macroeconomic Profile

• Company Profile

• Financial Analysis

• Business and Management Analysis

• Strength and Weakness

• Summary

1.Analyst Background :

Sami Ullah has a B.A. (Hons.) in English Language, Literature & Linguistics. He has worked as an Administration Manager at Hadaeq Al Jazeera Flowers Trading L.L.C in Dubai since 2010. Although his investment journey was initiated in 2021, it wasn't until January 2023 that he was actively investing in various tradable assets. Prior to taking this course, his investment analysis focused solely on the financials of companies, without considering their business analysis or macroeconomic conditions. The Fundamentals of Capital Marketscourse has completely transformed his investment perspective, which enables him to analyze companies from every possible angle.

2.Macroeconomic Profile:

Pakistan secured a Stand-by arrangement (SBA) for USD 3bn (USD1.2bn promptly disbursed) from the IMF at the close of June-23. Following the pivotal deal, Fitch upgraded Pakistan's sovereign rating from CCC- to CCC and SBP received significant and much needed inflows/rollovers.

After the successful SBA with IMF, PKR recovered to a high of PKR 275/USD, gaining around PKR 10/ USD in the interbank. However, pressure from easing imports caused the local currency to fall back to its pre-IMF levels. Pakistan REER appreciated from 85 in May-2023 to 91 in July-2023.

State Bank of Pakistan (SBP) kept the policy rate unchanged at 22% in MPC meeting held on July 31st, citng economic clarity, inflation downtrend, easing external account concerns and improved investor confidence.

I expect monetary policy stance to be largely driven by inflation movement which would be led by global commodity cycle and currency appreciation/ depreciation. The real interest rates are still in positive on a forward-looking basis. Going forward the buildup of foreign exchange reserves and declining inflation will provide space for the SBP to start the monetary easing cycle in the later part of the fiscal year. The pace and timing would be determined by the trend in Forex reserves.



During July-2023, CPI inflation also dropped to 28.3% as against 29% in June-2023. This decline was lower than the market expectation due to the incorporation of higher electricity tariff in CPI numbers following a commitment made with the IMF. The general trajectory for CPI inflation is likely to be on a declining trend going forward. However, gas price hike and second round effects are likely to slow down the process.

On the external front, following IMF support, SBP received significant inflows/rollovers from allied nations, boosting the country's forex reserves level to USD 8.2bn. However, the upcoming repayments of loans and easing import restrictions could lead to a decline in forex reserves.

Additionally, Pakistan atained a fourth consecutive monthly current account surplus of USD 334mn in Jun-23 compared to USD 255mn in May-2023. The surplus stemmed from the sustained restrictions on imports and capital outflow. The agreement with IMF bodes well for the external account outlook of the country with added confidence likely to lead to further financing.

During the outgoing FY23, Pakistan's fiscal balance exhibited a deficit of PKR 6.5trn, denoting a 24% YoY increase over previous fiscal year.

Oil prices (Arab Light) increased from $73/barrel in March-2023 to $88/barrel in August-2023. Due to increase in oil prices internationally and the commitments made with IMF to meet fiscal objectives, Government of Pakistan also announced an increase in petrol and diesel prices that would add further fuel to sky-high inflation.



Short term secondary market yields rose slightly during July-2023 with 3M/6M/12M T-Bill yields rising by 9-30bps. 3M/6M/12M T-Bill yields now stand at 22.95%, 22.99%, and 23.02%, respectively. 3Y PIB is yielding at around 19.46% (down 1bps) whereas 5Y PIB is yielding around 16.86% (up 78bps).

Benchmark KSE-100 index during the month witnessed a strong bull run with index closing at 48,035 points (up 16%). This rally stemmed from Pakistan rejoining the IMF program, a robust result season and a notable MoU signed between Pakistan and Saudi Arabia for a USD 10bn refinery project. Moreover, improved political clarity revived investor sentiment as elections are likely to be held on time. A step away from populist measures is a fresh but painful start towards economic recovery. I remain bullish on the market in medium to long term given the reforms continue and elections period does not brew political uncertainty.

Pakistan Stock Market despite the bullish rally continues to trade at an atractive PE of 3.5x making it one of the cheapest markets of the world.

3. Company Profile:

Honda Atlas Cars (Pakistan) Limitedis a public company incorporated in Pakistan on November 4, 1992. It is a subsidiary of Honda Motor Co., Ltd., Japan. The Company’s principal activities are assembling and progressive manufacturing and sale of Honda vehicles and spare parts.

On July 14, 1994, car bookings started at six dealerships in Karachi, Lahore, and Islamabad. Since then, the dealership network has expanded and now the Company has thirty-eight 3S (Sales, Service, and Spare Parts), twenty 2S (Service and Spare Parts), and five 1S (Spare Parts) authorized dealerships networks in all the major cities of Pakistan.

The company operates through the Manufacturing and Trading segments. The Manufacturing segment offers locally manufactured cars and parts. The Trading segment deals with the trade of completely built units and parts.

The company has shown a commitment to local manufacturing, with a significant plant expansion in 2006 to increase production capacity up to 50,000 units per year on double shift basis. It emphasizes the use of local parts, working with local vendors to meet Honda's global quality standards.

The Company commenced commercial production in July 1994 with the production of the Honda Civic. Since then, it has expanded its product line to include models like the Honda City, BR-V, and HR-V. Since the commencement of production, the Company has produced and sold more than 530,000 cars in Pakistan.

Currently, the company not only offers imported models of Honda Accord & Honda CR-V but has also introduced locally manufactured New Honda City, New Honda Civic, BR-V and HR-V.

Currently, the company is offering Honda Accord, Honda CR-V, Honda Civic (Three variant), Honda HR-V (Two variants), Honda BR-V, and Honda City (Three variant) in a wide range of colors with advanced technological features.

Various factors affect Honda Atlas Cars (Pakistan) Limited’s operations and performance. Some of these include:
Economic Conditions:Economic downturns can lead to decreased consumer spending on big-ticket items like cars. A weak economy can reduce demand for automobiles, affecting sales and revenue for the company.
Exchange Rate Fluctuations:As a joint venture with Honda Motor in Japan, Honda Atlas Cars is subject to currency exchange ratefluctuations. Changes in exchange rates can impact the cost of imported components and affect the company's profitability.
Regulatory Environment:Changes in government regulations related to the automotive industry, emissions standards, safety requirements, taxes, and tariffs can influence the company's operations, costs, and market competitiveness.
Competition: The automotive sector in Pakistan Stock Exchange is competitive, with other manufacturers vying for market share. Intense competition could lead to price wars, reduced margins, and the need for continuous innovation to stay ahead.
Customer Preferences: Shifts in consumer preferences towards different types of vehicles, features, or technologies can impact the demand for certain models, affecting the company's sales and product strategy.
Technological Advancements:Rapid advancements in automotive technology, including electric vehicles, autonomous driving, and connectivity features, may require significant investments for adaptation, and failure to keep up with these trends could make the company's products less attractive.
Oil Price Volatility:Fluctuations in oil prices can impact consumer preferences for fuel-efficient vehicles and influence the overall demand for automobiles.
Macroeconomic Factors:Interest rates in Pakistan, inflation, and overall economic stability can influence consumers' purchasing decisions and affect the company's sales and profitability.
Supply Chain and Raw Materials:The company relies on a global supply chain for sourcing components and parts required for vehicle manufacturing. Dependable access to quality raw materials and components is crucial for maintaining production schedules and product quality.

Financial Performance:

Growth Factors:

Four out of four growth factors fall into bad category. Again, it is obvious from the company’s revenue growth rate of 0.77% year on year over the last five years which is almost negligible figure. The sales declined from 108.05 billion in 2022 to 95.08 billion in 2023. The company revenue stands now at where it was in 2019. Although in 2019, HCAR’s topline posted a marginal year-on-year rise of 4 percent. Overall, it was a difficult year for the automobile industry as the fiscal budget 2018-19 imposed restriction on non-filers to buy new cars which massively restrained the overall industry sales volumes. Adding further fuel to this a 10 percent FED was levied on the locally assembled cars of 1700 cc or above. Pak Rupee depreciation also forced local assemblers to increase prices which also kept the potential buyers at bay. HCAR sold 48,648 units in 2019 as against 50,100 units sold in 2018. The 4% topline growth is merely on the account of price hike that year. Besides the 2019, the year 2022 was the only year where HCAR’s topline growth increased 60% year on year. Again in 2023, the HCAR’s topline decreased from 108.05 billion to 95.08 billion reflecting -12% decrease year on year. Again in 2022 the company faced one of the toughest challenges to cope with the economic downturns, highly competitive market, high interest rates and sky-high inflation which kept buyers away. Concludingly, the Automobile industry overall performances were affected by covid-19 outbreak in 2019 and worst economic conditions and restrictions on import of CKD Kits by the government afterwards added more troubles to the already struggling industry.

The Operating Profit of HCAR had been on the downhill journey since 2018. The Net Income declined from 6.49 billion in 2018 to merely 260 million in 2023. The net income was hit by heavy taxation at 86.88% tax rate including super tax. Similar goes with EPS, it declined from 45.48 in 2018 to almost negligible 1.82 in 2023. Again, the contributing factors to the decline in Operating Profit, Net Income and EPS is the negligible sales growth rate.

To summarize the growth factors, Honda Atlas Cars Pakistan Limited underperformed as compared to its peers which also faced the same tough economy situation and other notable factors mentioned-above.

Stability Factors:

Out of the 12 stability factors, 5 are positive; 6 are bad and one is in average category. The positive factors are Tax Rate, Interest Coverage, Debt to Equity, Cash Flows from Operations and Net Change in Cash. The Total Debt is increasing with time and the 3 years average is more than 5 years average but the Debt-to-Equity ratio is decreasing with time. The Total Debt is very less than the Equity; so, that’s why the Debt to Equity is low and is under good category. The company has accumulated Debt after 2019. The Trade & Other Payables stand at 37.7 billion in 2023 while in the most recent quarter as of June-2023, these stand at 26.8 billion.

The OP margin and NP margin had been ticking down since 2019. The company grew at a very poor growth rate almost negligible over the last five years. The net margins declined very sharply in the year 2023 due to heavy taxation.

The interest coverage ratio overall remained good and stable due to low debt levels. The current ratio overall remained in average category due to low-levels of short-term debt payments and the company somehow managed its trade payables.

The Cash Flow from Operations fall into good category because of the big negative CFO figure in the year 2019 which was -22.06 billion. If I strictly measure the CFO then this is also negative.

The company even didn’t convert 1% of its profits into cash. That’s why the cPAT is way bigger than cCFO reflecting the worst picture of the company. The company’s gross margins, operating margins and net margins are less than its peers and even with those less margins the company is still not able to convert them into cash. That’s why they accumulated debt after 2019 to manage its working capital.

The Net Change in Cash fell into good category because the company liquidated its short-term investments of 6.9 billion to manage its working capital and to handle the negative CFO of -4.1 billion in the fiscal year 2023.

The Net Fixed Assets Turnover is again the worst compared to the industry. The company has invested heavily in its fixed assets over the past years but it didn’t produce the results the company desired. The company fixed assets grew at 14.71% year on year over the last ten years but these didn’t help in genera?ng more sales.

Similar goes with the Return on Equity. The declines in net income over the years have driven the ROE to 1.30% in 2023.



Overall, the company depicts a worst picture in stability factors and the room for improvement seems unlikely in the near future owing to the slow down in the economy and high market competition.

Inventory Ratios

Out of six inventory ratios only 2 falls into good categories. The Days of Receivable is in good category due to lower sales growth over the years. Cash Conversion Cycle is in positive due to lower receivable days and high payable days.

Free Cash Flow Ratios

Out of five Free Cash Flows ratios only one “Free Cash Flow” is in positive and that is due to the 5 years average being in negative.

Valuation Factors:

The KSE 100 is available at an atractive valuation with the P/E of 5.09. Most of the companies are available at good valuation. But this is not the case with Honda Atlas Cars (Pakistan) Ltd. Out of 8 valuation ratios only four falls in good category. These include PEG ratio, PB Ratio, PS Ratio and EV-to-EBITDA. The Price to Earning Ratio P/E stands at 88.6 in 2023 as compared to the industry P/E of 6.77. The reason for high P/E in 2023 is the almost negligible annual EPS of 1.82. The P/E is way above the industry average P/E of 6.77 even if we compare the previous years’ P/E of HCAR.

The company is not giving any dividends but that is obvious due to lower net income and negative free cash flows. The Earning Yield is way less than the T-Bills, bonds and interest rates.

To summarize, the valuation factors don’t reflect a good picture. Investors are advised to stay away in investing in the company and even for the short term the company is not worth-considerable to invest.

Factors Summary

5. Business and Management Analysis

Business Factors:

Automobile Industry

The business environment remained difficult throughout the year. The automobile industry witnessed a significant decline due to import restrictions and faced unprecedented challenges. PKR devaluation, increase in taxes, high inflation, global supply chain disruptions and higher interest rates has added pressure to an overall slowdown of the economy.

The restrictions on the opening of LCs and foreign payments led to the disruption in the supply chain of the company. Resultantly, the company shut down its plant for more than two months during the year 2023.

The automobile industry in Pakistan is undergoing a severe recession. Downstream distribution and suppliers are also being affected. The industry’s volumes, as a result, witnessed a dip as the cumulative sales of passenger cars and light commercial vehicles for the year declined to 184,220 units as compared to 252,131 units last year. Similarly, the HCAR’s sales declined to 25,726 units as against 37,613 units in the preceding year. Additionally, the retrospective implementation of the super tax will further erode the botom line.

Large Scale Manufacturing (LSM)

Latest data released by PBS suggests that Large Scale Manufacturing Industries (LSMI) output during Jun’23 increased by 1.0% on MoM basis while down 15.0% YoY. The decline in LSM during FY23 can be atributed primarily to factors such as: policy actions taken by the monetary and fiscal authorities to slow down aggregate demand and the rising cost of doing business. The major contributor to the decline in LSM is Automobiles -50% year on year.

Sale Growth with Peers

The company didn’t generate sales and profits as compared to its peers.

Conversion of Sale Growth into Profits

The company did generate some average sales but these were not converted into good enough Net Profits due to higher production cost and other expenses.

Conversion of Profits into Cash

The company was not able to even convert 1% of its profits into cash. The cCFO is way less than the cPAT. The cCFO stands at -8.09 billion while the cPAT stands at 9.09 billion.

Increase in Production VS Sales

The production has declined since 2019; although it recovered to some extent in 2022 but fell back in the year 2023. In 2023 the sales were 95.08 billion but production declined. This was due to the aggressive price strategy adopted by the company to cope with the devaluation of rupee.

Management Factors:

Board of Directors

As of March 2023, the Board of Directors is comprised of three Independent Directors and six Directors representing Honda Motor and Atlas Group. There were three changes on the Board during the year, however, the statutory composition of the Board was maintained.

The advisory fee for Non-executive Directors is at 50.69 million, the remuneration of the CEO is at RS. 30 million and the remuneration of full-time directors are at 25 million for the upcoming year 2024.

Dividend Payout

The company didn’t give any dividend for the previous fiscal year ended March-2023. The overall Dividend Yield is even less than 4% in the previous fiscal years 2022, 2021 and 2020

Patern of Shareholding

As of March 31, 2023, the company has a total of 142.8 million shares outstanding which are held by 7,401 shareholders. Honda Motor Company Limited, Japan holds the major chunk of 51% shares of HCAR, followed by Shirazi Investments Private Limited with 30.2 % in the company. General public accounts for 7.23% shares of HCAR while financial institutions hold 5.11% shares. Mutual funds in Pakistan and Joint stock companies hold 0.92% and 1.53% shares of HCAR respectively. Mutual Funds holdings have decreased from previous 1.90% to 0.92% this year. Investment companies have a stake of 1.30 percent in the company. The remaining shares are held by other categories of shareholders holding less than 1 percent shares of HCAR. The Directors, CEOs and executives shares holding is almost negligible

6.Strength and Weakness

Strengths

1.Brand Reputation: Honda Atlas Cars benefits from the brand reputation of the global Honda brand. The company's success is influenced by the positive image and perceived quality associated with the Honda name.
2.Subsidiary of Honda Motor Company Limited Japan
3.Diversified its business by taking stake in its 16 associated companies

Weakness

1.Bad Annual Growth
2.Cyclical Industry
3.Weak Fundamentals

7.SUMMARY

Overall, the company is not worth considerable for investment neither for short term nor for long term. Fundamentally the company is very weak and I even analyzed its previous 10 years financial statements to smooth out the results but the results were not satisfactory at all.

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