Oxford

MENTOR NAME: FARAZ TAHIR

WORD COUNT: 7492

Brookes
University
Topic-8 An Analysis
and Evaluation of
Business and
Financial
performance of
Indus Motor
Company from 2012-
2014
ACCA ID: 2325546

Kazi Haris Hussain

 Oxford Brookes University

Contents
PART 1- PROJECT OBJECTIVES AND RESEARCH APPROACH .............................................................. 2
Reasons for choosing this topic.................................................................................................. 2
Reasons for choosing the industry and organisation.................................................................... 2
Project objectives and research questions .................................................................................. 2
Research Approach ................................................................................................................... 3
PART 2- INFORMATION GATHERING, ACCOUNTING & BUSINESS TECHNIQUES USED FOR THE
COMPLETION OF PROJECT............................................................................................................. 4
Information Sources.................................................................................................................. 4
Secondary Sources .................................................................................................................... 4
Ethical Issues ............................................................................................................................ 5
Techniques used for research .................................................................................................... 6
Part-3 Results, analysis, conclusions and recommendations ............................................................ 8
Introduction of the Organisation................................................................................................ 8
Financial Analysis...................................................................................................................... 8
Ratio Analysis ........................................................................................................................... 8
Profitability Ratios .................................................................................................................... 8
Liquidity Ratios ....................................................................................................................... 14
Solvency Ratios....................................................................................................................... 16
Efficiency Ratios...................................................................................................................... 18
Investors Ratios ...................................................................................................................... 20
Competitor Analysis.................................................................................................................... 23
Business Analysis........................................................................................................................ 28
SWOT Analysis........................................................................................................................ 28
PEST Analysis.......................................................................................................................... 29
Conclusion and Recommendations .............................................................................................. 31
Conclusion.............................................................................................................................. 31
Recommendations.................................................................................................................. 32

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PART 1- PROJECT OBJECTIVES AND RESEARCH APPROACH

Reasons for choosing this topic
I have chosen Topic-8, which is “An analysis and evaluation of the business and financial
performance of an organization over the three year period”. The main reasons behind this
decision are;
 Being an ACCA affiliate ratio analysis is nothing new for me as I have been using it in my
studies, so it was quite easy to undertake this topic.
 Being an accountancy student, evaluating and analysing the financial performance and
the company as a whole is related to my studies so it was really easy and helpful for me,
applying the knowledge I already had and in a way I got to test my competence.
 The data required for this topic and project was easily available and hence no hurdles
were there in its acquisition.

Reasons for choosing the industry and organisation

 I have had inherent interest in automotive industry and I wanted to explore in depth
about the industry itself
 IMC is one of the biggest market players and undertaking such a company would
provide me with a lot of knowledge.
 Automotive industry is not one of the major industries in Pakistan and I wanted to
discover reasons for this.

Project objectives and research questions

I prepared list of certain performance objectives which are as follows;

 To analyse the company’s financial performance in terms of Profitability, Liquidity,
Solvency, Efficiency and Investment.
 To get a clearer picture of company’s real position in the industry. Competitor’s Analysis
would be undertaken for this.
 To assess that how the external factors could affect company’s performance. For this, I
would use PEST analysis.
 To identify and assess company’s internal Strengths and Weaknesses. Moreover to
bring some opportunities to light which the company could exploit and identify the
external threats being faced by IMC. SWOT analysis would be used for this.
 To appraise the performance over last three years using the most reliable and best
available information.
 To make recommendations to company on the basis of my learning about the company.

Research Questions

Following are my research questions;

 How would I gather the information for my analysis and what will be the methods for
assuring the reliability of the information sources?
 How much I would have to rely upon the models being used for business analysis?

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 What ratios would I use for analysing the performance?

 What are factors behind the significant contrast in IMC’s and its competitors’ profitability?
 Which factors are affecting the automotive industry in Pakistan?

Research Approach
After selecting industry and company along with setting aims and objectives of the project, next
step is to devise a suitable approach for achieving those objectives. Like every analysis, main
part of my approach is information gathering.
I will gather information from different secondary sources including books, eBooks, online
newspapers, journals and Company’s annual reports. Secondary sources are easily accessible
and readily available. However if information gathered from secondary sources would not be
sufficient enough then I will move to the primary sources as it would provide more authentic
and legitimate information. But it may give rise to some issues, most importantly ethical ones.
Once data is collected, my understanding of the company and its industry will be sufficient and
then I would identify and fix tools for analysing company’s financial and business performance.
After completing the analysis I will check that if my aims are completed and once assured I
would give my conclusion and recommendation.
I am well aware that plagiarism is strictly disallowed by OBU and is unethical as well therefore I
shall make sure that the information provided in my project is properly referenced, legitimate,
relevant and authentic.

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PART 2- INFORMATION GATHERING, ACCOUNTING & BUSINESS

TECHNIQUES USED FOR THE COMPLETION OF PROJECT

Information Sources

Primary Sources

A primary source of information is any file or object which is a result of a particular study and
research and it depicts first-hand information. It provides inside information about a particular
event. (Princeton, n.d.)

Method Information Obtained Limitations

I interviewed Mr.Muhammad  Information relevant to
Huzaif (Deputy Manager my RAP was obtained
Internal Audit at Indus Motor from primary source
Company Ltd) on Skype. He is which would have been
my uncle and hence decided to unavailable otherwise. I
provide me with information approached Mr.
relevant to my thesis. Muhammad Huzaif
with a prepared
questionnaire in order
to get the relevant
information and save
time.
 It was time taking as
Mr.Muhammad Huzaif
was busy and had to
make time for me out
of his hectic schedule.
This resulted in my
project delay.
 There were some
confidentiality issues
regarding the provision
of information such as
Director’s policy,
working capital
management policy
and stocks related
information.
 Due to poor internet
connection between us
there were lags in our
conversation which
caused me to repeat
my questions a couple
of times.

Secondary Sources

A secondary source of information is created by someone who has no direct involvement in the
affairs being researched about. Secondary sources keep on changing periodically as they are
updated as a result of different research works. (Illinois, n.d.)

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Method Information Obtained Limitations
Company’s Annual Reports  Company’s Annual
Reports were the most
conveniently available
source of information.
The financial data used
for the ratio analysis
was extracted from
them.
 Moreover various
reasons for the variation
in the figures were also
obtained from the
Director’s Report and
Notes to the Accounts
which would have been
unavailable otherwise.
 Furthermore a lot of
information relevant to
the business analysis
was also derived from
them.
E-newspapers  News articles as well as
analyst reports from
well-known newspapers
and journals were one
of the main sources of
authentic and reliable
information.
Search Engines  I also used search
engines primarily
Google for getting links
to relevant information
for the project. It was of
huge help as it provided
me with considerably
large set of information.
Ethical Issues
In order to comply with the guidelines provided by OBU, I referenced all the information obtained
from different sources, using Harvard Referencing System. The primary purpose of this was to avoid
Plagiarism and to authenticate my research work.
 The information
obtained from Annual
Reports appeared to be
biased as it shared only
positive and good
statistics about the
company
 The inherent limitation
of misstating the
financial statements
was always there.
 The data was historical
which could not give a
fair image of company’s
performance
 The basis of articles and
the purpose of writing
them were mostly
different and deriving
the relevant data from
them was a difficult job.
 Article writer may be
delivering a biased
opinion and hence an
unfair judgement,
therefore the reliance
on the articles was
challenging.
 Finding relevant articles
was a time taking job.
 Sorting out the most
relevant data out of
apparently relevant
data became a tough
job. This analysis-
paralysis consumed a lot
of time.
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Techniques used for research

For analysing financial performance of the organisation, I made use of;

Ratio Analysis

Ratio analysis is a tool used for analysing the financial condition and performance of an organisation.
Ratios provide the yardstick needed for this analysis.

(Prenhall, n.d.)

I made use of important ratios for my analysis. These ratios throw light on all the key components of
financial statements. These ratios will be used for assessing the company’s performance over three
years as well as for comparing it with its competitor. The ratios are;

Profitability: These ratios assess the organisation’s ability and capacity to generate revenue and
profits.

Liquidity: These ratios throw a light on how liquid an organisation is, which means that what is the
capacity of the organisation to pay off its short term debts.

Solvency: Solvency ratios throw a light upon how much secure and organisation is in terms of
covering its liabilities through its assets.

Efficiency: These ratios show that how effectively and efficiently an organisation uses its assets and
manages its liabilities.

Investment: These ratios give an idea about how much investment potential and prospects an
organisation has i.e. what is the confidence level of investors regarding the organisation. They are
used by the potential investors.

Limitations of Ratio Analysis

 There may be difficulty in comparability as different companies may have different

accounting policies e.g. FIFO or AVCO in case of inventory.
 There could be a difference between an asset’s book value and its current value.
 A ratio does not disclose its components and hence there could be multiple reasons for
change in ratios.
 An industry average may not be the best one for comparison purposes.
(Wiley, n.d.)

PEST Analysis

A PEST analysis is used to analyse the external macro-environmental factors that affect a firm and
are beyond its control. If tackled properly these factors could be worthy opportunities and could also
cause threats otherwise.

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It is used by the businesses to understand the big picture of the external environment they are
operating in.
(Mindtools, n.d.)

Limitations of PEST Analysis

PEST analysis may be limited because;
 The external factors being examined change at a very fast pace thus making prediction of
external changes affecting the organisation a difficult task.
 PEST analysis considers only external environment. Therefore it needs to be seen along with
other components in order to get a clear picture. It cannot depict the organisation’s
condition in isolation.
 Gathering large amount of relevant data and external information is a difficult job as it
makes PEST analysis time consuming and costly as well.
(Thakur, 2010)

 PEST Analysis is highly based upon assumptions which may be groundless and without any
reference.
(Haughey, n.d.)
SWOT Analysis
SWOT is used for analysing a company’s environment and also gives an idea about its position in it.
It focuses on both internal and external factors that affect an organisation’s performance and
existence. Internal factors include assessment of the company’s Strengths and Weaknesses while
external factors comprise of the analysis of opportunities and threats present in the organisation’s
environment.
(The Economic Times, n.d.)
Limitations of SWOT Analysis
Although it is of limitless use, SWOT analysis also has some limitations;
 SWOT does not provide an in-depth analysis and hence could not be used for complex
issues.
 SWOT does not prioritise an issue.
 It can generate ideas but cannot help with choosing which one is the best.
 It is difficult to report two-sided factors i.e. whether a factor is opportunity or threat.
(Queensland, 2014)

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Part-3 Results, analysis, conclusions and recommendations

Introduction of the Organisation

Incorporated in 1989, IMC is a joint venture of HOH, TMC and TTC. Main products include variants of
famous ‘Corolla’ model in sedan category, ‘Hilux’ in LCV category and Fortuner in SUV segment. The
assembly plants and offices are located at 105-acre site at Port Qasim in Karachi. It has a wide
network comprising of 37 independent 3S dealerships.

(Brecorder, 2014).

IMC also sells limited units of Daihatsu Brand vehicles. The company has played a major role in the
development of entire value chain of the local auto industry.

(Toyota Indus, n.d.)

Financial Analysis

Ratio Analysis

Profitability Ratios

Gross Profit Margin

12.00%
11.00%
10.00%
9.00%
8.00%
7.00%
6.00%
5.00%
4.00%
3.00%
2.00%
1.00%
0.00%
2011 2012 2013 2014
Gross Profit Margin 6.63% 8.53% 9.18% 10.15%

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FY 2012

GPM rose by 29% which is 4% more than the 25% increase in sales revenue. This was due to
company’s continuous efforts at cost reduction resulting in reduced COS and pursuit of operational
excellence, increasing the quality of products.

(Annual Report, 2012)

An increase in prices of cars is one of the reasons of this rise. Moreover due to closure of car plant of
HACL (main competitor of IMC) from December 2011 to February 2012 the customers shifted to IMC
resulting in relatively more sales. Furthermore growth in home remittances played their part by
strengthening the purchasing par of customers who bought cars despite the price rise.

(Khan, 2012)

Announcement of much anticipated new Corolla 2011 model also enhanced the sales. The new
features added to the Car were well received by the customers longing for change in the car design.
Introduction of new design also persuaded the customers to buy the car regardless of the price hike.

(Tribune, 2011)

Introduction of new variants of its sedans and the launch of 4x4 Vigo Champ was well received by
the customers and hence increased the sales.

(Annual Report, 2012)

FY 2013

Sales revenue declined by 17%, the primary reason of this being discontinuation of “Daihatsu Cuore”
and therefore leaving the 850cc-1000cc segment empty. Moreover the Rupee depreciation and
introduction of new car models by its competitor Honda also played a vital role in bringing the sales
down.

(Mehdi, 2013)

Relaxation on the policy regarding import of used cars worsened the situation.

(Annual Report, 2013)

However GPM still shows an increase by 8%. Main reason for this is the introduction of “Fortuner”,
the sole locally manufactured SUV launched by IMC with its price being 40% lower than its imported
version (Brecorder, 2013a). Its 812 units were sold within 4 months of its introduction (Annual
Report, 2013).

Introduction of new variants of existing cars also played an important role in rise of GPM.

(Brecorder, 2013b)

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Depreciation of Yen against Pak Rupee also helped IMC in increased GPM by lowering the cost of
CKD kits.

(Zaheer, 2013)

Moreover, the COS fell by 22.44% mainly due to decline in purchases which dropped by 22.32%
following the drop in demand.

(Annual Report, 2013)

FY 2014

GPM showed an upward trend of 11% despite the fall of 11% in net sales. This fall was due to loss of
1500 units’ production and sales as a result of production plant closures for retooling the machinery
to make it ready for the production of new model. Also there was an overall fall of 8% in the
automotive industry demand.

(Annual Report, 2014)

The drastic fall of 70% in the sales of “Fortuner” also explains the sales decline (Rind, 2014).

One of the reasons of such a high increase in GPM is 7% rise in Pakistani Rupee in the third quarter.
This resulted in decreased cost of imported parts and hence a low COS, therefore increasing GPM
despite the price-cuts.

(Zaheer, 2014a)

Moreover the company introduced customized version of Hybrid Car “Prius” which enabled it to
target a new segment which was previously occupied by the used imported cars (Tribune, 2013a).

Reduction of 30% in depreciation charge also reduced the COS and therefore positively affected the
GPM (Annual Report, 2014).

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Net Profit Margin

8.00%

7.00%

6.00%

5.00%

4.00%

3.00%

2.00%

1.00%

0.00%
2011 2012 2013 2014
Net Profit Margin 4.45% 5.59% 5.26% 6.79%

FY 2012

NPM amplified by 25.74% due to an increase of 56.8% in net profit. NPM increased because of
significant fall in the finance costs. The finance costs fell because of the 9.7% decline in Mark-up on
advances from customers followed by 50.47% exchange loss further cutting the finance costs.

(Annual Report, 2012)

Increase of 17.6% in other operating income due to income from treasury bills and sale of a fixed
asset also played its part in raising the NPM.

(Brecorder, 2012)

Distribution expenses increased at lower rate of 18.9% as compared to 47% in 2011. This represents
efficiency of IMC at controlling costs.

Salaries drastically increased by 29.5% which was mainly due to rise in employee provident fund
(Annual Report, 2012).The minimum wage rate was also increased thus raising the salaries of
workers (Dawn, 2012).

Increase of 35.7% in administrative expenses was due to 16.8% rise in salaries. Moreover there was
a significant increase of 151% in the staff training costs. Furthermore the advertising costs also rose
by 11.6% followed by increase of 45% in Other Expenses.

(Annual Report, 2012)

FY 2013

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NPM showed a decline by 5.9% despite the increase in GPM. Main reason of this was poor cost
control as compared to last year. Distribution expenses reduced by 0.74% despite unit sales decline
of 28%. Moreover administrative expenses increased by 2.6%. Despite the fall in sales, this increase
depicts lack of control over operational expenses.

(Annual Report, 2013)

Decrease of 41.6% in other income also contributed towards the fall in NPM. Other Income
deteriorated due to fall of 60.86% in return on bank deposits. Fall of 44.8% in income from Treasury
bills also played its part in this decline (Annual Report, 2013).A cut in the discount rate by 300 basis
points resulted in lower other income (Zaheer, 2013).

Salaries and wages rose by 10.2% (Annual Report, 2013).This was due to the statutory increase in
the minimum wage rate (Tribune, 2013b).

Other operating expenses reduced by 15.5%. The reduction of 21.3% in the WPPF was the main
reason of this fall.

(Annual Report, 2013)

FY 2014

NPM showed a huge increase by 29.04% despite the decline in sales. This hike in NPM was due to
efficient cost control exhibited by IMC. Only finance cost showed an increase of 24.6% as compared
to last year since it could not be controlled internally. However drop of 29.1% in taxation charge
somewhat countered the effect.

(Brecorder, 2014)

Administrative expenses decreased by 1.4%. This decrease was mainly due to the plant closure for
18 days regarding the retooling of machinery but it also depicts the good control over costs by IMC.

(Annual Report, 2014)

Distribution expenses declined by 2.5% due to the drop in sales. IMC didn’t make much expense on
advertisement hence reducing them by 9.8%. Staff training costs increased by 26.5% due to the
special training sessions by internationally renowned speaker.

(Annual Report, 2014)

Other operating income escalated by 7.3%. Although the return on bank deposits declined by 17.6%
but its effect was mitigated by 35.5% increase in the gain on redemption of investments in listed
mutual fund units..

(Annual Report, 2014)

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Return On Capital Employed

40.00%

35.00%

30.00%

25.00%

20.00%

15.00%

10.00%

5.00%

0.00%
2011 2012 2013 2014
Return On Capital Employed 28.96% 37.45% 28.26% 25.38%

FY 2012

ROCE increased by huge 29% following the significant increase of 55.83% in NPM. ROCE amplified
from 28.96% to 37.45%.

PBIT increased due to significant hike in the sales. IMC issued no shares during the period however
reserves showed an increase by 21.7%. This was mainly due to the transfer of Rs.1.56 billion from
the profit to general reserve.

Equity increased by 20.5% due to the increase in reserves.

(Annual Report, 2012)

FY 2013

ROCE dropped by 24.53% during the year. This was due to 21.51% fall in the NPM. NPM dropped as
a result of 17.06% fall in the net sales.

The decrease in PBIT was due to both poor sales and lack of control on expenses. No share issue was
made during the period. Despite the fall in profit, reserves still increased by 4.18% due to the
transfer of Rs.1 billion from profit to general reserves.

Equity increased by 3.99% and it was mainly due to the transfer to reserves

(Annual Report, 2013)

FY 2014

After huge drop in FY 2013, ROCE still dropped but by a lower percentage of 10.19% despite the
minimal increase of 1.08% in PBIT.

(Annual Report, 2014)

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Increase in reserves resulted in lower ROCE. Reserves increased mainly due to transfer of Rs.1.5
billion from profit. The issued shares remained constant. Equity increased by 12.56% which once
again was almost equal to the increase of 13.14% in reserves, thus explaining the cause of this
increase.

(Annual Report, 2014)

Liquidity Ratios

Current and Quick Ratios

4
3.5
3
2.5
2
1.5
1
0.5
0
Current Ratio Quick Ratio
2011 1.84 1.38
2012 2.32 1.59
2013 2.99 1.93
2014 3.35 2.61

FY 2012

CR increased by 26% while the QR showed a hike by 16%. Sales for the year were the highest of IMC
(Zaheer, 2012). The huge increase of 32.33% in the stock-in-trade was primarily for coping up with
customer demand and is the cause of the gap in CR and QR.

Cash and bank balances also increased by 22.2% following the huge sales increase.

(Annual Report, 2012)

Other receivables also showed a massive increase of 199.31%. This upsurge was mainly due to rise in
Warranty Claims, agency commission and other receivables due from TTC, a related party. It was 32
times more than the amount in FY 2011. Moreover, unrealized gain arising from revaluation of
foreign exchange contracts also increased significantly by 176 times thus strengthening the
company’s asset base.

(Annual Report, 2012)

Current liabilities showed a decline by 15.2%. Trade and other payables increased by 13.44% but this
was easily countered by fall of 41.35% in advances from customers and dealers which reduced

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despite hike in sales. Moreover 55.23% fall in accrued mark-up played its part in dropping current
liabilities.

(Annual Report, 2012)

FY 2013

CR further strengthened by 29.18% and QR showed a hike of 21.14% despite the fall of 7.89% in
current assets. This was primarily due to fall of 28.70% in current liabilities. The drop of 63.42% in
advances from customers and dealers resulting from fall in sales was the main reason of this decline.
This sales decline also reduced trade and other payables by 7.66% further reducing the liabilities.

(Annual Report, 2013)

Stores and spares dropped by 13.76%. Moreover trade debts fell by 5.29% due to low sales.
Following the sales decline, stock-in-trade increased by 4.70% as production was more than sales.
Once again it resulted in lower QR as compared to the CR.

Most significant factor behind the decline in current assets was huge 61.05% fall in cash and bank
balances.

(Annual Report, 2013)

Other receivables dropped by 63.75%. This drop was mainly due to 90.99% fall in warranty claims &
other receivables. The 7.89% decline in Current Assets limited the CR and did not let it improve
further.

(Annual Report, 2013)

FY 2014

Despite fall of 9.67% in current assets, CR still increased by 12.02%. QR also showed a significant hike
of 35%.

This was mainly due to fall of 19.38% in liabilities which was more than the rate by which current
assets dropped. Main reason behind reduction in current liabilities was the 29.28% fall in trade and
other payables which reduced most significantly because of 68.45% drop in trade creditors. However
advances from customers and dealers increased by 23.20% which was a result of improved sales.

(Annual Report, 2014)

Stock-in-trade significantly dropped by 43.30%, effect of which could also be seen in the QR. This
was mainly due to discontinuation of the 10th generation corolla. Moreover trade debts increased by
25.64% due to the improved sales. The 180.15% increase in debts due from government agencies
also played their part in rise of trade debts. Strengthening of sales also led to improvement in cash
and bank balances which increased by huge 63.46%.

(Annual Report, 2014)

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Solvency Ratios
Gearing Ratio
2011 2012 2013 2014
Gearing Ratio % 0.00 0.00 0.00 0.00

IMC is wholly an equity based organisation as it finances all its operations through equity. Long term
liabilities section only consists of Deferred Taxation. Therefore its Debt to equity ratio remained zero
from 2012 to 2014.

Interest Cover
180
160
140
120
100
80
60
40
20
0
2011 2012 2013 2014
Interest Cover 53.02 108.34 162.86 132.14

Since IMC is totally equity based company therefore finance cost used for the calculation of Interest
Cover consists of interest on short term borrowings, mark-up on advances from customers and also
contains effects of foreign exchange gains and losses.

FY 2012

Interest cover rose from 53.02 times to 108.34 times. This hike of 104.35% was primarily because of
55.83% increase in the PBIT.

(Annual Report, 2012)

Moreover finance cost dropped by 23.74% which resulted in robust interest cover. Finance cost
dropped because of unrealized gain on revaluation of creditors. The decrease in exchange loss by
50.47% also contributed to the fall in finance cost.

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(Annual Report, 2012)

FY 2013

Despite the significant fall in PBIT, interest cover showed an increase of 50.32% as it jumped from
108.34 times to 162.86 times. Main reason of this was 47.79% drop in finance costs. This drop was
mainly led by the reduction in mark-up on advances from customers which reduced from Rs.22.507
million to just Rs.0.270 million, a reduction by 98.80%.

(Annual Report, 2013)

PBIT reduced by 21.51% which restricted the growth of interest cover.

(Annual Report, 2013)

FY 2014

Despite the increase of 1.08% in PBIT, interest Cover deteriorated by 18.87% following the upsurge
of 24.59% in finance costs.

(Annual Report, 2014)

The mark-up on advances from customers further dropped significantly by 89.63%, finance cost still
increased because of the augmentation of bank charges by 24.08%. Moreover exchange loss also
increased by 27.49% playing its part in increasing the finance cost. Unrealised loss on creditor’s
revaluation also contributed to the finance costs rise.

(Annual Report, 2014)

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Efficiency Ratios

Efficiency Ratios
2014

2013

2012

2011

0 5 10 15 20 25 30 35 40 45 50 55
2011 2012 2013 2014
Inventory Days 36.05 39.04 49.63 31.82
Creditor Days 5.6 6.52 5.92 2.11
Debtor Days 8.64 7.31 8.56 11.98

FY 2012

Debtor Days: Despite the huge increase in sales, debtor days reduced from 8.64 days to 7.31 days.
Main reason of this was the stringent credit control policies exhibited by IMC.

(Huzaif, 2015)

Creditor Days: Creditor days increased from 5.60 days to 6.52 days. This was due to the increase in
trade payables following significant hike in the sales.

(Annual Report, 2012)

Inventory Days: The inventory days slightly reduced from 34.49 days to 34.27 days. This was due to
the efficient inventory management through application of kaizen technique.

(Huzaif, 2015)

Despite the huge increase in sales, WCC slightly increased from 39.09 days to 39.83 days. This was
due to the good inventory management and increase in creditor days.

FY 2013

Debtor Days: Debtor days almost remained the same by showing a minimal increase of 1.25 days.
Again this was due to tightened debt policies.

(Huzaif, 2015)

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Moreover both the trade debts and net sales dropped which restricted the debtor days from a
significant rise.

(Annual Report, 2013)

Creditor Days: The creditor days fell to 5.92 days. This was mainly due to the fall in trade creditors.
IMC faced lower sales and hence low level of credits therefore declining the trade creditors.

(Annual Report, 2013)

Inventory Days: Following the last years’ trend, high sales were expected and for which high stock
was maintained. However substantial drop in sales lead to the stock pile up which resulted in the
significant rise of inventory days from 39.04 days to 49.63 days.

(Huzaif, 2015)

WCC increased to 52.27 days. This was due to the huge increase of 10.59 days in inventory days
followed by minimal fall in creditor days.

FY 2014

Debtor Days: Debtor days increased from 8.56 to 11.98 days. Main reason of this increase was the
revival after huge sales drop last year. Moreover increased orders from government agencies raised
the trade debts.

(Annual Report, 2014)

Creditor Days: Creditor days dropped from 5.92 to 2.11 days due to huge decline in the creditors
(Annual Report, 2014). Following the improved sales, cash and bank balance increased by significant
63.45%. This strong cash balance resulted in the on-time payments and thus reducing creditor days
(Huzaif, 2015).

Inventory Days: The inventory days dropped from 49.63 days to 31.82 days. Inventory also reduced
by huge 43.30%. This improvement was also a result of increased sales. The new corolla model had
high demand which caused quick inventory turnover.

(Annual Report, 2014)

WCC exhibited a major decrease from 52.27 days to 41.69 days. Efficient inventory management and
increased sales reduced the inventory days and hence countered the increase in debtor days. This
was further backed by the creditor days fall.

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Investors Ratios

Earning Per Share (Rs.)

60

50

40

30

20

10

0
2011 2012 2013 2014
Earning Per Share (Rs.) 34.9 54.74 42.72 49.28

Share capital remained constant from 2012-2014.

FY 2012

EPS showed a significant growth of 56.84%. The main reason was huge increase in net profit which
increased by 56.84% following the impressive sales.

FY 2013

EPS declined by 21.97% because of the decline in net profits. Net profits dropped by 21.97% due to
significantly lower sales as compared to last year.

FY 2014

EPS improved as it increased from Rs.42.72 to Rs.49.28 exhibiting a 15.37% growth. Sales were
better than the last year which resulted in an increase by 15.37% in the net profit which ultimately
lifted the EPS.

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Price Earning Ratio

12

10

0
2011 2012 2013 2014
Price Earning Ratio 6.3 4.48 7.28 10.92

FY 2012

Despite the rise in share price, P/E ratio declined from 6.30 to 4.48, showing a decrease of 28.97%.
This was due to the huge increase of 56.84% in EPS which outweighed the share price rise.

FY 2013

P/E ratio significantly increased by 62.61%. The main reason for this massive growth was the
noticeable decline in EPS.

Moreover the Share price grew from Rs.245.10 to Rs.311 (Annual Report, 2013) which furthered the
improvement in P/E ratio.

FY 2014

P/E ratio further climbed from 7.28 to 10.92, exhibiting a 49.92% rise. Although EPS increased but
the significant growth in the share price from Rs.311 to Rs.537.9 (Annual Report, 2014) outweighed
its rise and resulted in higher P/E ratio.

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Dividend Yield
14.00%

12.00%

10.00%

8.00%

6.00%

4.00%

2.00%

0.00%
2011 2012 2013 2014
Dividend Yield 6.82% 13.06% 8.04% 5.48%

FY 2012

Dividend yield massively increased from 6.82% to 13.06% exhibiting a growth of 92.06%. The main
reason was huge rise in dividend which increased from Rs.15 to Rs.32.

(Annual Report, 2012)

This dividend rise also resulted in increased market price of shares which rose by 11.41%.

FY 2013

The dividend yield declined to 8.04%. Main reason of this fall was the drop in dividend for the year
which was Rs.7 less than last years’ dividend.

(Annual Report, 2013)

Moreover the rise in share price also contributed towards the decline of dividend yield.

FY 2014

Despite the increased dividend, dividend yield further declined to 5.48%. The dividend rose from
Rs.25 to Rs.29.5 (Annual Report, 2014). This increase led to massive growth in the share price. Share
price increased from Rs.311 to Rs.537.9 exhibiting a 72.96% growth. This rise in share price resulted
in reduced dividend yield.

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Competitor Analysis
Competitor Analysis with HACL would throw light on true market share and performance of IMC.
IMC had a better profitability in terms of Gross and Net Profit margins. However HACL showed a
significant upsurge in the ROCE.

Profitability Ratios
100
90
80
70
60
50
40
30
20
10
0
Return On Capital
Gross Profit Net Profit
Employed
IMC 10.15 6.79 25.38
HACL 7.3 2.74 89.3

IMC’s gross profit was 102.77% higher than HACL. This was due to significant increase in the sales.
Both companies had almost same level of sales in small passenger vehicles but IMC had an edge
because of increase in sales of Pickup and SUV segments. Although IMC’s market share declined
following the decline in overall demand in automotive industry, still it was 17% more than HACL.

(Annual Report, 2014)

The all-time second highest sales of HACL enabled it to shrink the gap between IMC’s and its GPM.

(HACL Annual Report, 2014)

Moreover the COS of HACL was also higher thus resulting in a lower GPM. Despite the fact that
HACL’s COS dropped this year.

IMC had significantly better NPM than HACL. Although finance cost of HACL exhibited a massive drop
but still it was notable part of the operating profit.

(HACL Annual Report, 2014)

On the other hand IMC’s finance costs were only 0.76% of the profit from operations. Moreover
IMC had a higher operating income following the contribution in solid investments. The expenses of
IMC were in line with the income and sales.

(Annual Report, 2014)

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HACL exhibited a good cost control this year but still its costs were higher than IMC thus reducing its
NPM.

(HACL Annual Report, 2014)

IMC’s return to the shareholders decreased by a minor rate as a result of the huge set back in
previous year. HACL provided a huge return on capital employed to its shareholders following the
huge increase in its Profits.

Efficiency Ratios
45
40
35
30
25
20
15
10
5
0
Debtor Days Creditor Days Inventory Days
IMC 11.98 2.11 31.82
HACL 0 5.5 38.74

WCC of IMC and HACL exhibit a significant difference. HACL does not encourage credit sales.
Therefore it has zero debtor days (HACL Annual Report, 2014). On the other hand IMC’s trade debts
majorly comprise of Government organizations which resulted in average 10.76 debtor days (Annual
Report 2014).

IMC pays off its trade debts in 2.11 days which is due to its tremendous liquidity position. Contrarily
HACL takes 5.5 days to pay its creditors. Despite the fall in its creditor days, HACL still takes more
than twice the time of IMC to pay off its trade creditors.

IMC takes 31.82 days to turnover its inventory due to higher demand and hence resulting in high
sales (Annual Report, 2014). On the other hand HACL takes 38.74 days to covert its inventory to
cash (HACL Annual Report, 2014). Although its liquidity improved but still IMC exhibits better
position in terms of liquidity.

Conclusively, HACL has slightly better WCC. The difference among the working capital cycle of the
two is due to the nil debtor days of HACL. Both the companies have revived from poor performances
and hence regaining their efficiency levels.

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Liquidity Ratios
4

3.5

2.5

1.5

0.5

0
Current Ratio Quick ratio
IMC 3.35 2.61
HACL 0.89 0.5

IMC is showing an upward trend in its liquidity ratios and hence resulting in a hefty difference
between liquidity of the two. This contrast is due to huge difference amongst the current assets and
current liabilities of both. IMC’s current and quick ratios are higher than HACL’s ratios.

IMC has no short term borrowings and maintains high inventory primarily due to the strong demand.
Also the application of Kaizen technique helps IMC with the inventory level.

Moreover IMC has high level of short-term investments which make its liquidity position even
better.

(Annual Report, 2014)

On the other hand HACL has no short term investments making liquidity position weaker. Moreover
HACL has significantly higher trade payables further worsening the liquidity position and thus
affecting its current and quick ratios.

(HACL Annual Report, 2014)

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Solvency Ratios
140

120

100

80

60

40

20

0
Gearing Ratio Interest Cover
IMC 0 132.14
HACL 2.35 56.08

IMC has no gearing as it is totally equity based organisation (Annual Report, 2014) and has been like
this for past seven years. On the other hand despite a significant fall HACL still has higher gearing as
IMC’s long-term liabilities only consist of deferred taxation (Annual Report, 2014) whilst HACL has
other components too primarily including the deferred liabilities (HACL Annual Report, 2014).

As IMC is fully funded through equity, therefore its interest cover ratio is significantly higher as its
finance costs are minute as compared to those of HACL’s (Annual Report, 2014). HACL is still reviving
from negative gearing and hence its interest cover ratio is significantly inferior. Despite the fact that
its interest cover ratio has improved (HACL Annual Report, 2014).

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Investor Ratios
60

50

40

30

20

10

0
Earning per Share Price Earning Ratio Dividend Yield
IMC 49.28 10.92 0.055
HACL 7.52 7.32 0.054

Despite the lower P/E ratio than HACL, IMC’s EPS is significantly higher. This difference was due to
the higher net profit of IMC. HACL has a lower net profit and has higher number of issued share
capital thus decreasing its EPS. HACL’s P/E ratio is higher because of its significantly lower EPS.

(HACL Annual Report, 2014)

IMC announced increase in dividend thereby increasing the market price of its shares. The increased
price also depicts the confidence shareholders have in IMC.

The dividend yield of both the organisations is almost the same. This is because the dividends of
both the companies are in alignment with their market prices.

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Business Analysis
SWOT Analysis
Strengths

 IMC has a favourable position and investors seem really confident about their spending in
IMC as it is continually growing in terms of share price.
(Tribune, 2015a)
 Financial analysis and competitor analysis prove that IMC is a financially sound company.
 IMC is a pioneer in terms of workplace safety as there were no workplace injuries,
consecutively in last three years.
(Annual Report, 2014)
 IMC manufactures sedan cars from 1.3L to 1.8 L which enables it to target a large segment
and hence does not give very much room to its competitors in this segment.
(Zaheer, 2014b)
 Toyota Pakistan is the only car manufacturer with all of its dealers providing 3S (Sales,
Service, Spare parts) facilities to its customers. Moreover it is further expanding its network
across Pakistan.
(Annual Report, 2014)
 The Pakistani variant of Toyota corolla is the highest selling Toyota Corolla in Asia Pacific.
Moreover it is the 5th largest worldwide producer of Toyota Corolla cars.
(Ullah, 2015)
 Toyota is most popular automotive brand due to its firm establishment.
(Hembel, 2014)

Weaknesses

o Despite the huge sales volume, Corolla Xli variant lacks the features like Power
windows and ABS brakes which are readily present in its main competitor Honda
City.
(Hira, 2014)
o Of the 13% market share, almost 80-90% cars are the 1.3L variants despite the
manufacture of higher horsepower variants as well. IMC is unable to strengthen the
sales in 1.6L-1.8L segment which is due to poor marketing strategy.
(Hembel, 2014)
o The prices of cars are highly sensitive to the exchange rates as important parts are
imported and hence highly affected by the rupee depreciation.
(Abduhu, 2012)

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Opportunities

 IMC could provide warranty facility for imported Prius cars. This would win them the
customer’s confidence and will satisfy hesitant potential customers as well.
(Abbas, 2014)
 IMC could manufacture more fuel efficient cars as customers are ready to compromise
luxury for the fuel efficiency.
(Zaheer, 2014b)
 Small car segment could be enjoyed by manufacturing below 1000cc cars as this segment is
no longer being enjoyed by IMC following the discontinuation of Dailhatsu Cuore.
(Hassan, 2012)
 Toyota Prius has a good perception amongst drivers in general as it is an envi ronment
friendly “green” vehicle (Huzaif, 2015). IMC should use effective marketing to increase its
sales in this segment because a lot of people prefer alternative-fuelled cars having a very low
carbon footprint.

Threats

o Imported cars have severely affected sales of the local car manufacturers and could
also do so in the future as propositions for relaxation in age limits of used cars are
provided by APMDA.
(Tribune, 2015b)
o The competition is increasing as Suzuki has introduced a big horsepower car and the
possibility of more introduction of such competition cannot be ignored (Memon,
2015). Moreover Germany is showing interest in the automotive industry. This
would further increase the competition (Imaduddin, 2015). The government is also
taking measures to pave way for new entrants (Bhutta, 2015).
o Economy of Pakistan is expected to fall (Tribune, 2015c). This could lead to a fall in
the sales of IMC.

PEST Analysis
Political

o The government is considering penalising car dealers upon late car deliveries by
imposing interest payments. There appears to be no room for genuinely delayed
deliveries.
(Tribune, 2015d)
o The industry is suffering from bad law and order situation in the country thus
affecting IMC by increasing the cost.
(Annual Report, 2014)
o Inconsistent government policies regarding the auto industry in general and import
of used vehicles in particular is affecting the automotive industry adversely.

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(Ghumman, 2014)
o However the withdrawal of 10% Federal Excise Duty on motor vehicles by the
government exceeding 1800cc is a blow of fresh air and would result in increased
sales by lowering the prices.
(Brecorder, 2014)

Economic

o Pakistan’s economic growth is expected to be second lowest in the region (Rana,

2015). This slow growth rate is due to challenging political and security conditions
(ADB, 2015).
o Inflation rate of Pakistan is continuously falling mainly because of the dip in fuel
prices (Trading Economics, 2015). This would positively impact the purchasing par of
buyers.
o The interest rate has been decreased and is at an all-time low in 13 years (The News,
2015). This would enable the customers to get loans for buying cars at lower interest
rates.

Social

o IMC participates actively in the welfare of communities neighbouring its plants and
facilities.
(Toyota Indus, n.d.)
o IMC has been an active participant of the welfare work needed whenever the
country faces any natural calamity or emergency.
(Toyota Indus, n.d.)
o In the past decade, middle class has increased rapidly and this has led to an
increased number of private cars (Farooq, 2012). IMC should pay attention to this
factor and produce cars targeting the needs of middle class.
o IMC has set up a wastewater treatment plant with a capital investment of Rs.50
million, to recycle water used for plantation. Moreover IMC was the first automobile
company to commence environment friendly gas in car air-conditioners.
(Toyota Indus, n.d.)

Technological

o The introduction of navigation system by IMC in its cars has been widely appreciated
by the customers (Annual Report, 2013).
o IMC was the first to introduce hybrid vehicles in Pakistan by launching Prius.
(Annual Report, 2013)
o An agreement has been signed between SMEDA and JICA which would provide
technical assistance to Pakistan therefore improving the productivity and quality of
auto-parts.
(JICA, 2015)

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Conclusion and Recommendations

Conclusion

Financial Analysis

Profitability of IMC showed a mixed trend. This was due to fluctuation in both IMC’s sales and
industry performance.

IMC faced its all-time high sales in FY 2012 due to marvellous industry performance and good
customer reaction. This record making year was followed by a huge dip in sales which was due to
poor economic condition and overall fall in demand. The Cost of sales continuously decreased in the
past 3 years thus showing an efficient control over the cost as compared to its competitor.

The liquidity of IMC also exhibited a continuous improvement. The cash and bank balances of the
company are also handsome thus enabling the company to pay off its short-term liabilities. Current
and quick ratios show a firm position.

IMC has no gearing as it is totally an equity based organisation. Moreover it is also strong from the
view of interest cover. This means that IMC has enough income to pay off the finance costs.
However its interest cover has decreased in the current year following increase in the finance costs.

After the huge decline in WCC, IMC witnessed slight dip in terms of efficiency. This was primarily
because of fall in creditor days. Due to good cash situation IMC was in position of paying its creditors
quickly thus reducing its creditor days. The debtor days increased following the increase in orders by
the government agencies. Inventory days also decreased due to the huge turnover in the stock
following the introduction of new models.

Investors of IMC are satisfied as IMC has maintained to pay them a dividend hence increasing the
share price. EPS also increased followed by increased P/E ratio.

Competitor Analysis

IMC has outperformed HACL in terms of profitability. HACL has relatively poor cost control therefore
leading to lower profit margins. However ROCE of HACL is higher following the increase in earnings.
Moreover the liquidity position of HACL is also poor as compare d to that of IMC. The solvency of
HACL is also worse than IMC as exhibited by the ratio analysis. WCC of HACL showed some
improvement as compared to IMC.

Business Analysis

SWOT

IMC is the most popular brand due to its firm brand establishment. It has the widest and most
efficient dealership network. It could further improve its position by introducing facilities to align
with its competitors. The company is facing potential competition but it could be overcome with the
introduction of more fuel efficient cars since the customers long for them.

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PEST

The inconsistent Govt. policies have led to an uncertainty regarding the future of automobile
industry. However the expected economic growth and decline in interest rates is a blow of fresh air.
Active participation in social activities has made IMC a good corporate citizen. Moreover with the
introduction of latest navigation systems IMC has got an edge over its competitors.

Recommendations

 IMC should produce more fuel efficient vehicles since the middle class w ant economy more
than the speed.
 IMC should introduce low horsepower cars targeting the 800-1000cc sector which was left
empty after the discontinuation of Cuore.
 IMC should increase its local production in order to decrease its dependency on Japan
regarding the main components. This would help IMC by mitigating the foreign exchange
risks it faces currently.
 IMC should bring the hybrid technology to lower horsepower cars too. This would broaden
its span by producing relatively cheaper vehicles from both cost and fuel efficiency
viewpoint.

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