Prepared by: Murtaza Ghazi

Date:

Research and Analysis

Project

Toyota Indus Motors

Introduction

I have selected topic # 8 for the Research Analysis Project. I have selected this topic primarily due to the fact that I enjoy working with numbers and interpreting them. How various financial analysis impact the stakeholder’s decision have always fascinated me. During the course of this project, I will attempt to increase my understanding of interpretation of a company’s performance and at the same time present it in a manner which makes it easier for the users of the financial statements understand them.

Company Selection

The company that I have selected for my project is Toyota Indus Motors, primarily because of my personal affiliation with the company, (I have driven a Toyota vehicle for as long as I can remember) and also my fascination about how a company like Toyota has maintained its excellence over a long period of time.

History (http://www.toyota-global.com/company/history_of_toyota/)

It all began in 1933 when an automatic looms company, Toyota, ventured into automobile production. Early on the designs of the vehicle were strikingly similar to their American counterparts. Recovering from the verge of bankruptcy in 1949, the company was given a lifeline due to the Korean War, as America had ordered around 5000 vehicles from Toyota, during the war.

A change in top level management in 1950 combined with the vehicles ordered for the war, kick started the rise of Toyota to a top level vehicles manufacturer.

Management and Production Techniques introduced by Toyota

( http://www.toyota-global.com/company/history_of_toyota/ )

Toyota has been credited with revolutionizing the production process. Toyota was the introducer and pioneer of the ‘Just-in-Time’ production technique; it introduced it into its production process back in 1939. Just in Time method seeks to eliminate wastage of time, resources and hence save costs. It seeks to order materials just and only when they are required, thereby reducing cost of holding the raw materials. It seeks to keep in house stock levels virtually zero.

Creative Idea Suggestion System- is a tool that allows workers to be involved in the decision making process, by taking suggestions from workers on how to further improve the production process and as a result save cost and/or improve quality.

Total Quality Control was adopted by Toyota in 1961. Now known as Total Quality Management (TQM), its main emphasis (as the name depicts) is on quality. This management tool requires continuous improvement in the quality and process of production, which involves everyone in the production process to be responsible to meet or exceed customer expectations.

Toyota in Pakistan

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. The majority shareholder is the House of Habib.

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.

Heavy investment was made to build its production facilities based on state of the art technologies. To ensure highest level of productivity world-renowned Toyota Production Systems which have also explained earlier are implemented.

Major Products

IMC's Product line includes 6 variants of the newly introduced Toyota Corolla, Toyota Hilux Single Cabin 4x2 and 4 versions of Daihatsu Cuore. They also have a wide range of imported vehicles. Indus Motors has tried to cover every market segment in its products.

Indus motors have 6 variations of Toyota Corolla to cater to quite a few niches.

Corolla has basically three variations- Altis, Xli and Gli. These two categories are further subdivided into more categories.

Xli

The Xli version has 1300 CC engine which is very simple for those people who want to drive a Corolla just for the sake of driving a Corolla. This version has little accessories, no central locking, and no power windows. It has been priced lower than the Gli series to make the sedan more affordable for those who just want a corolla.

Gli

The Gli version is for those who want a car with all the features; this version is fully loaded with central locking and ABS. Corolla Gli also has a 1300 CC engine. This car is priced slightly higher than Xli due its accessories and aims to target audiences with slightly higher income levels.

Altis

The Toyota Corolla Altis goes all out on luxury. This model comes with a 1800 CC engine and has all the accessories like automatic gears, sunroofs, keyless entry, airbags etc. This car targets the high level income earners.

Hillux Vigo

Toyota Hilux is a pickup truck, it’s an attempt for diversification. It is the only

Cuore

The only Daihatsu vehicle manufactured in Pakistan, this is the car aimed at people with lower income levels. It is the Indus Motors’ answer to the Suzuki Vehicles’ influx of affordable economy cars. It is the only vehicle in its range that comes with the option of automatic transmission.

Overview of the Industry

The overall automobile industry has slowed down in its growth over the last few years, partly due to the global recession and partly due to the influx of reconditioned Japanese cars which are fuel efficient and also provide more comfort and luxury at a relatively cheaper price.

Sale and Production of Cars 1300cc and above2009-10 2010-11 2011-12

Honda CivicProduction 5,648 6,408 5,396

Sale 5,908 6,365 4,977

Honda CityProduction 7,852 9,294 7,089

Sale 8,212 9,121 7,142

Suzuki LianaProduction 900 614 334

Sale 1,025 470 450

Suzuki SwiftProduction 2,578 4,376 7,128

Sale 2,353 4,080 7,040

Toyota CorollaProduction 43,382 41,419 46,352

Sale 43,510 41,111 46,207

As it can be judged from the table above that Toyota has had the lion’s share of the market. We will analyze these figures further in depth when calculating ratios.

Research Objectives and Aims

Perform analysis of financial statement of Toyota Indus Motors Company from 2011-2013.

Perform Competitor Analysis by comparing performance IMC with its main competitor HONDA

Perform an Internal Analysis Using SWOT

Perform an External Analysis Using PESTEL

This analysis will help reader understand how financial and business performance of IMC differed from its competitor and its future prospects. Practically such analysis facilitates institutional and private shareholders in making investment decisions.

Analysis of the financial statements for the year ended June 2011, 2012 and 2013.

At what competitive age, IMC enjoys its brand recognition.

It is important for a plc to comply with code of corporate governance. Is IMC following the code of conduct in Pakistan and till what extent?

A respectable company is generally environmental friendly. Does IMC commit itself towards these social and corporate responsibilities?

Information Gathering

It is vital to gather relevant and reliable information in order to discuss about the position and performance of an organization and draw a conclusion on that basis. Information of IMC is gathered from: 1-Annual Reports

2-Toyota Indus Motor Company’s Official Website (www.toyota-indus.com)3- Pakistan Automobile Association (PAMA)

It must be mentioned here that all the data used in this project has been gathered from secondary sources.

Limitations for Collecting Information: Information which I have analyzed in this RAP is based on three year financial history of Toyota Indus Motor Company Ltd that is for the years ended at June 2011, 2012 and 2013 respectively. The latest official full year end for IMC is June 2013 and next would be for the year end June 2014, not available yet. My report will only identify trends and make conclusions based on the results until June 2013. My RAP did not require visiting the office of IMC as substantial amount of information is available in the annual reports and official website of IMC. Competitor (Honda’s) information is available in the report just for the purpose of comparison and nothing else. My report is based on past information (2011-2013); it strictly does not depict the future of IMC. It is not for shareholders or institutional investors to predict the future of the company; it is just the analysis for a thorough understanding of IMC. My RAP only focuses on IMC.

Ethical Issues While Collecting Information: Before starting my report, I read Oxford Brookes University’s Code of Practice „Ethical Standards for Research involving Human Participants‟. In my report, I have tried my best to adhere to all the ethical standards. The whole research and preparation is solely by me.

I did not encounter any major issues while collecting data as information was easily available. No secret information of IMC is used in this RAP. I am aware that I cannot include any confidential information without the consent of chosen organization. One of the main ethical requirements of this RAP is providing references appropriately according to Harvard Referencing System. Certainly, if the information is without any reference then one would assume it as blunder or information made by myself. References are also provided from where the information is gathered (Annual Reports and Official Website). To my knowledge I have not violated any ethical context in the completion of this assignment.Accounting and Business Techniques Used: Financial Information Ratio Analysis:

Ratio analysis is the process of comparing and quantifying relationships between financial variables, such as those variables found in the statement of financial position and income statement of a company.

It will include analysis of financial ratios including Profitability, Liquidity, Investors and Solvency ratios. Formulae of all the ratios are provided in appendix. Ratios help to work out the profitability that shows the actual performance of the organization and also give information about the company’s solvency.

Ratio Analysis has certain limitations which are:

1. It does not tell the entire story of the organization.2. Year-end values may not be representative. Certain account balances that are used to

calculate ratios may increase or decrease at the end of the accounting period because of seasonal factors. Such changes may distort the value of the ratio.

3. Ratios are subject to the limitations of accounting methods. Different accounting choices may result in significantly different ratio values.

4. I would again like to stress upon the fact that the ratios represent the past performance of the company and do not necessarily predict the future of the company

Trend Analysis: Trend analysis is carried out on the revenue of the company. It evaluates a company’s trend in terms of growth and measures a company’s performance over a given time period. This can prove to be useful for management, creditors, investors and executive directors in assessing in which direction the company is going.

Graphical Representation: Presenting research information in graphical method is one of the best ways to communicate information. Users find it easy to understand the information in this way. My analysis includes charts and graphs of the ratios discussed in part 3 of the report. Bear in mind that too many variables in one graph will confuse the reader therefore one should limit the number of variables used in a graph. Most of the graphical representations are prepared through spreadsheet software Microsoft Excel.

NON-FINANCIAL INFORMATION SWOT ANALYSIS:

SWOT analysis is a strategic planning method used to evaluate the Strengths, Weaknesses, Opportunities, and Threats involved in a project or in a business venture. It involves specifying the objective of the business venture or project and identifying the internal and external factors that are favorable and unfavorable to achieve that objective.

The four components of a SWOT analysis have identified and defined below:

1. Strengths- These are the strong points of an organization which give it an advantage over its competitors

2. Weaknesses- These are the deficiencies that a company may possess which hamper the entity in its growth and success.

3. Opportunities- These can be any chance that a company gets to succeed due to an external factor or a combination of external factors.

4. Threats- These can be any combination of external factors that may hinder a company’s success.

PESTEL Analysis

Stands for Political, Economic, Sociological, Technological, Legal, Environmental, is another strategic decision making tool that explains how the macro environmental forces impact a company’s ability to sustain and survive in markets, making decisions, identifying opportunities and accordingly deciding future plans. This term was first discussed by Aguilar in 1967 in his book “Scanning the Business Environment”, as ETPS (Economic, Technical, Political and Social). This name evolved into STEP (Strategic Trend Evaluation Process) in a book by brown, than into STEPE analysis (Social, Technological, Economical, Political, and Ecological). The word PESTEL along with its variations PEST and STEEPLE was founded post 1980, which also included Demographic and International Factors.

Political: are external factors that the stakeholders of a company cannot control, such as environmental regulations, employment laws, trade reforms, Tax policies, tariffs, Political instability and trade restrictions etc.

Economic: takes into account both internal and external factors that affect the companies decision making. The internal ones include financial techniques and practice to be used to assess the soundness and viability of a certain project. The external factors may be economic growth, inflation, exchange rate, unemployment level, Tax rates, wage rates, working hours, sources of finance, sources of credit etc.

Sociological: takes into account all those factors that impact markets socially. A project taking place in an area brings advantages and disadvantages to the people living in that area, such as norms and values, environmental and health factors, cultural expectations, population dynamics, career and job opportunities etc.

Technological: take into account all factors that affect technology, since technology becomes outdated within a short period of time. It also considers changes in financial decisions and barriers to entry in different markets.

Legal: takes into consideration all legal aspects of a business operation, such as taxation, resources, quotas, imports and exports, employment etc.

Environmental: involves environmental and ecological factors that can be either economic or social in nature. The factors could be, weather, natural disasters, nearby water and transportation sources, temperature, ground conditions etc.

Advantages and Disadvantages of PESTLE analysis:

Advantages:

Simple and easy to use Helps understand the business environment better Helps building strategic thinking Helps minimizing the effects of potential business threats Helps identify new opportunities for projects

Disadvantages:

Needs to be updated regularly in order to be effective Most data used is based on assumptions Access to data resources is required which could be costly and time consuming It becomes extremely difficult for projects to anticipate developments, since the business

environment keeps changing This tools is only effective when people come from different departments with different

perspectives

Definition of 'Porter's 5 Forces'

Named after Michael E. Porter, this model identifies and analyzes 5 competitive forces that shape every industry, and helps determine an industry's weaknesses and strengths.  (Ref:

1. Competition in the industry2. Potential of new entrants into industry.3. Bargaining power of suppliers4. Bargaining power of customers5. Threat of substitute products.

Other non-financial information

I will also be referring to other socio-economic indicators during the course of this project. The source of the figures and statistics that I will quote will be from the chartered accounting firm of KPMG Taseer Hadi and Co. They publish a budget brief annually which is available online on their website

SWOT Analysis

Strength: Recently in 2011, IMC produced an environmentally-friendly and economical new corolla Ecotec (Xli and Gli), which delivered the same performance and durability while being economical and eco friendly. IMC is able to maintain its consistent durability, quality and reliability standards, which gives them a competitive advantage over their competitors, i.e Honda. While considering and maintaining these factors, the prices of their vehicles are much more nominal and reasonable as compared to that of their competitors. Apart from that , IMC has a strong management which has a long term positive impact on its decision making and operations, which also adds to its value. IMC are also known for having customers loyalty not because people in Pakistan do not have much options for buying different cars, but due to their consistent standards in providing good after sales services. The brand name of Toyota is itself the biggest strength, as they have maintained a history of producing one of the best cars in the world and expanded rapidly around the world.

Weaknesses: Toyota has recently been having a high staff turnover, which has proved really expensive in the short term having a negative impact on its brand name. Being the founders of JIT time management tool, they have a weak supply chain, which has resulted in delay of arrival of their products to their customers, which can have a negative impact in the long run, as customers may end up cancelling their orders. Being highly leveraged, IMC faces a risk of being bankrupt, if they end up making poor and ineffective decisions. They also face risk of high interest payments, which can decline profits in the long run. Having increasing expensive and high interest payments, Toyota’s cost per unit of output becomes very high, which is a result of lack of scale that IMC must consider, since it will help reduce costs by maintain quality while increasing volume.

Opportunities: IMC has an opportunity to produce medium size cars for the middle class market, since the economical environment of Pakistan has sustained high inflation so much that it is hard for the middle class to buy expensive cars. Producing medium sized cars, can help attract these people, thereby increasing sales and profits in the long run. This can be done by innovation of producing unique products and services that will meet the demands and needs of these customers. Technology can help build competitive barriers against their rivals i.e Honda, by bringing in new technology to better meet their customer’s needs. Entering new markets will help IMC to increase their sales volume and profits in the long run, helping them diversify their portfolio of products and services, and expand their business throughout the country, and internationally.

Threats: Pakistan’s economy has always been troubled due to its high instability caused by various factors, such as uncertainty, and changing governments. This can hinder IMC’s business operations by decreasing the number of potential customers. The political environment has always been unstable throughout the country, which has led the governments to frequently changing business regulations, having a negative impact on their operations and decision making. Since Mature markets are highly competitive, IMC must increase their markets share, which can be time consuming and costly. Since Pakistan has the availability of substitute products and highly gasoline prices, the customers tend to switch to substitute products, which can hinder the decisions of IMC’s ability to maintain high prices

PESTEL Analysis

Political: the political environment of Pakistan has always been changing, uncertain and unstable since its independence. Since than, no organization in Pakistan has ever been immune from the decisions made by various governments that came in and ruled Pakistan. All the governments that came in have been known for their inconsistent policies, like changes in customs, duty tariffs, and monetary and fiscal policies, in this has had a lot of negative impact in Toyota Indus motors business operations.

During 1995, the various taxes and tariffs were combined into one import duty of 30 percent on Complete Build Up Vehicles and also Complete Knock Down vehicles of Toyota. The sales tax on these vehicles increased to 18 percent in 1996, followed by a decision of the ministries of industries and production of reducing the duty on these CKD vehicles from 40 percent to 35 percent. In 2008 the sales tax was increased to 16 percent which resulted in a price hike on vehicles from Rs. 80,000 to Rs. 100,000. The Sa

les tax rate further increased to 17 percent between 2010 to 2011.

Economical: The rising inflation has always been the major economic factor that has affected the Pakistan’s automobile sector. The current inflation rate recorded last month was 7.39 which is comparatively low, as the highest ever recorded inflation was in December 1973 of 37.81 percent.

This portrays how the government’s economic policies influence the survival and progress of various industries in Pakistan.

Social: Toyota Indus motors, due to its brand name and customer loyalty, takes pride in being the most trusted name throughout the country. They respect the culture, values and customs of every community and nation at large, by influentially contributing to the economic and social development through corporate activities in various countries including Pakistan. They have been able to maintain quality standards, reliability and luxury comfort, that has built trust among the people of Pakistan.

Technological: Technology plays a vital and critical role in the increase of quality and productivity of every organization. Toyota has adhered in implementing technological changes in the production of their vehicles, which as a result has stimulated and boosted their sales and profits in the long run. Toyota has been able to maintain low maintenance costs and resale value of its vehicles, which has enabled them to win their customers support and loyalty. They have provided variety to their customers by diversifying in their products in terms of color, engine size, option of factory fitted CNG kit, internal options etc. They offer a product range of 8 different corollas and 5 versions of Hilux. They have also introduced, the SRS airbag system in their corolla GLI manual and automatic models, in their drive to maintain their “Safety First” Commitment. The durability in their vehicles is maintained by implementing the “Pitospaate Primer” technology, that assures a long run anti corrosion, with the help of an extra thick color coating.

Environmental: the environment of Pakistan is a rough, which Toyota needs to take into consideration, when p roducing their vehicles. The roads are rough, the weather throughout is extreme, hence Toyota needs to ensure the highest quality of every part assembled in their vehicle, including tyres, suspension, color and extra thick coating, and their anti-corrosion technology “Pitospaate Primer”, which enables them to maintain the durability of their vehicles. The people as a team in Indus Motors are committed and motivated to continuously improve their environmental management system, to comply with all applicable legal, regulations and other requirements in Pakistan, assist the society by making the environment more friendly and identify and eliminate all those environmental aspects that have a negative impact on the environment of Pakistan.

Legal: The legal regulations and policies in Pakistan consistently changes as the new government comes in, after every tenure. Hence Toyota has to adhere and comply with these new rules and regulations, in order to survive and maintain their standards and brand name throughout the country.

Porter’s Five Forces Model.Supplier Power: there are a lot of spare parts suppliers in Pakistan. Hence the prices set by each supplier is highly competitive, giving IMC an advantage of purchasing parts in bulk from various suppliers, thereby reducing their costs. Toyota IMC not only has to respond to the customers they have supply but also the various sources from which they get their supplies, hence Toyota gives their suppliers their deserving importance and respect, thereby building a strong relationship with them. IMC receives their major supplies of CBU vehicles and CKD kits from Japan. Since Toyota’s aim is to achieve maximum level of customer satisfaction, they strive in building strong relationships with both local and foreign suppliers. They believe that improved quality, better shipping arrangements, information of major price changes and advanced technological and market developments is achieved by maintaining strong supplier relations friendly and professionally.

Buyer Power: Buyers in Pakistan tend to switch to different brands in the automobile sector since they have various options, to switch to companies, like Honda, Suzuki, reconditioned cars that are cheaper.

Competitive Rivalry: IMC’s main competitors are Honda and Pak Suzuki (who has the highest market share in Pakistan), although they maintain the 2nd highest market share after them. There are other substitutes available in the markets in terms of fuel efficiency, size and shape of cars that leads to competitive rivalry. Also there are a lot of suppliers in the market which increase both supplier and buyer power, hence Pakistan’s market is highly competitive.

Threats of Substitution: there are a lot of dealers who are importing used vehicles from various countries, that also include re conditioned vehicles, and this has negatively affected the margins of indus motors, since they are different branded cars, better in quality and cheaper as compared with the vehicles of Indus Motors.

Threats of new Entrants: few years ago the government encouraged the import of vehicles buy decreasing the custom duties, and increasing the depreciation rate from 50% to 60%, which has encouraged the entry of newer brands, and causing Toyota to suffer from poor profit margins and declining sales.

Financial Ratio AnalysisSales Growth

2011 2012 2013

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-20

0

20

40

60

80

100

120

toyotaHonda

Toyota indus motors sales declined by 17% in the current fiscal year from Rs. 76,962,642,000 to Rs. 63,829,075,000. This was a result of decline in its sales volume, due to the rise in inflation this year, and also the petroleum prices and CNG prices. Other factors that contributed to this decline was the change in the government, who than changed the policies and regulations. Also the vehicle sales volume declined from 55,060 units in 2012 to 38,517 which is a 30% reduction of sales volume in 2013. The sales revenue of IMC was the highest in 2012 with a figure of Rs. 76.962 million increasing by 22% as compared with the sales figure in 2012.

Despite having the 3rd largest market share after IMC and having a low sales figure as compared with IMC, Honda managed to boost their sales by 96.15 % in 2013 with a sales figure of Rs. 30,762 million which was about Rs. 46.2 million. There sales had declined by 14.5% in 2012, but grew by 14.9% in 2011. Although Honda did not out perform in their sales as compared with IMC, having boost their sales by 96.15% was an achievement.

Gross Profit Margin

2011 2012 20130.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

8.00%

9.00%

10.00%

ToyotaHonda

IMC managed to increase their gross profit margin in these years from, 6.63% in 2011 to 8.53% in 2012 to having the highest in 2013 of 9.18%. Although their cost of sales increased every year from Rs. 57.613 million in 2012 to Rs. 70,400 million in 2012, they had managed to increase their gross profit margin. The reason behind this was maintaining higher sales price per unit of vehicles, and also selling the highest volumes which increased every year in these 3 years.

IMC had managed to outperform Honda’s gross profit margins as their margins declined from 0.81% in 2011 to 0.01% in 2012, but slightly managed to increase their margins in 2013 to 6.17%. The reason behind this increase was a remarkable 96.15% boost in their sales in 2013, which lead them from earning a gross loss of Rs. 43.999 million in 2012 to earning a gross profit of Rs. 1.447 million in 2013.

Net Profit Margin

2011 2012 2013

-6.00%

-4.00%

-2.00%

0.00%

2.00%

4.00%

6.00%

8.00%

ToyotaHonda

IMC Toyota had again outperformed Honda in having higher net profit margins in all these three years from 4.45% in 2011, to 5.59% in 2012 and 5.26% in 2013. Although their Net profit margin slightly decreased this year, due to increased expenses of Rs. 6.371 million in 2013 from Rs. 4.088 million in 2012, they had still outperformed Honda.

Honda had earned Net losses in the first two years, having a net loss margin of-1.18% in 2011 to a much more decline in 2012 of -3.99%. But due to their boost in sales in 2013 of 96.15%, they had managed to maintain a net profit margin of 2.25%, having earned a net income of Rs. 2.44 million, From earning a net loss of Rs. -5.32 million in 2012 and Rs. -9.87 million in 2011.

Return on Equity

2011 2012 2013

-80.00%

-60.00%

-40.00%

-20.00%

0.00%

20.00%

40.00%

60.00%

80.00%

ToyotaHonda

IMC had a return on equity of 19% in the year 2013, as they had managed to earn a net income figure of Rs. 4.302 million that year. The reason behind this was a decline in their cost of sales from Rs. 70,400 million in 2012 to Rs. 57,972 million in 2013, which lead to an increase in their net income despite having their sales decline by 17% in 2013. However they had the highest return in equity of 25.3% in 2012, although their net income had declined by (Rs. 945,170) in 2013 year. The reason behind having maintained this percentage was having the highest net profit of Rs. 4,302 million in 2012. IMC had a return on equity of 19.43 % in 2011, which was due to having the lowest net profit of Rs. 2,743 million compared with the figures of 2012 and 2013.

Honda did not earn their shareholders any return on equity to their shareholder’s in 2011 and 2012, as their ROE declined from -14.83% in 2011 to -61.32% in 2012. This was due to earning Net losses of Rs. -248.667 million in 2011 and Rs. -702.139 million in 2012 ( these figures are from the month of June of current year to the June of Next fiscal year, Honda had fiscal year end from 1st April to 31st March, So I had to calculate figures from June to next year’s June for Honda). However they had maintained to earn a ROE of 57.1% in 2013 due to their drastic boost in sales by 96.15% that year, which earned them a net income figure of Rs. 792.855 million in that year.

Current Ratio

2011 2012 20130

0.5

1

1.5

2

2.5

3

3.5

ToyotaHonda

Toyota IMC proved to manage their working capital effectively in the last three years, as their Current ratio kept improving from 2.19:1 in 2011, to 2.32:1 in 2012, to 2.99:1 in 2013. Although their current assets declined from Rs. 24,088 million in 2012 to Rs. 22,187 million in 2013 due to their decline in Cash reserves from Rs. 10,771 million in 2012 to Rs. 4,195 million in 2013, the had managed to reduce their current liabilities from Rs. 10,305 million in 2012 to Rs. 7,412 million in 2013, which lead to an increase in their current ratio in these two years. They had also managed to pay off most of their current liabilities by reducing it from Rs. 12,260 million in 2011 to Rs. 10,305 million in 2012. These figures have sufficiently proved that Toyota has good working capital management system.

Honda although managed to slightly improve their current ratio from 0.67 in 2011 to 0.56 in 2012 to 0.77 in 2013, these figures are not up to the standard of industry averages. Although their current assets increased from Rs. 4.629 million in 2012 to Rs. 10.558 million in 2013, their current liabilities also increased from Rs. 8.251 million in 2012 to Rs. 13.738 million in 2013 due making heavy credit purchases. Honda needs to improve their credit management system and their working capital management system in order to meet their short term credit requirements.

Acid-Test Ratio

2011 2012 20130

0.5

1

1.5

2

2.5

ToyotaHonda

Toyota IMC displayed improved results in their Quick Ratio, as it was seen improving from 1.72:1 in 2011 to 1.59:1 in 2012 to 1.93:! in 2013. The reason why it declined in 2012 was due to the money tied up in their stocks, which increased from Rs. 5.690 million in 2011 to Rs. 7.529 million in 2012. However they managed to improve it in 2013, by paying of most of their trade creditors as their figures reduced from Rs. 6.512 million in 2012 to Rs. 6.013 in 2013, and also by paying off their advances from customers and dealers and reducing this amount from Rs. 3.823 million In 2012 to Rs. 1.398 million in 2013.

Honda displayed a similar trend as in their current ratio but of course lower in performance as compared with that with Toyota’s figures. Their ratio was 0.26:1 in 2011 which declined to 0.22:1 in 2012, but increased to 0.45:1 in 2013. The reason why they were able to improve it this year was due to increase in their cash balance from Rs. 82.477 million in 2012 to Rs. 3534.967 million in 2013.

Accounts Receivables Collection Period

2011 2012 20130

0.5

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1.5

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2.5

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3.5

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4.5

5

ToyotaHonda

Toyota has showed improved performance in making their collections from their Debtors, in the last three years. Their collection period was 8.78 in 2011, which further improved to 6.68 days in 2012, but slightly declined to 8.13 days in 2013. They made earlier collections and were able to reduce their trade debts from Rs. 1.356 million in 2011 to Rs. 1.459 million in 2012 to Rs. 1.382 million in 2013. Another reason why the collection period improved was due to the improved in their sales growth from 2.68% in 2011 to 24.7% in 2012. The collection period increased in 2013 due to the decline in sales by -17% percent.

The figures for Trade debts of Honda were not available in their annual reports, since they could not recover most of their debts and incurred bad and doubtful debts of Rs. 16.142 million in 2012 and 2013. Honda has to improve in making good relations with their Trade debtors and make sure that their debtors are able to pay off their money.

Accounts Payable payment period

2011 2012 20130

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200

ToyotaHonda

IMC displayed a payment period of 41.9 days in 2011 which further improved to 34.9 days in 2012, but again increased to 45.9 days in 2013. The reason why their collection period was the best in 2012 was due to paying most of their creditors off and having a figure of Rs. 5.740 million, which than increased to Rs. 6.512 million in 2013 and resulted in an increase in payment period. However their figures weren’t as bad as compared to that of Honda, as their payment period were 123.4 days in 2011 which further increased to 173.4 days in 2012, but they managed to improve it to 124 days in 2013.

Interest Cover

2011 2012 2013-2000

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ToyotaHonda

IMC had displayed amazing figures for their interest cover, as their interest cover improved in the last three years due to their improvement in Net Profit margins. Their interest cover was 160.7 times in 2011, which improved to 280.2 times in 2012 and even improved further 15433.6 times in 2013. This humongous amount was due to paying off most of their Interest payments which were Rs. 25.443 million in 2011 to Rs. 22.739 million in 2012, and it further declined as they paid most of their payments to Rs. 324,000 in 2013, even though their EBIT declined from Rs. 6.371 million in 2012 to Rs. 5,000 million in 2013.

Honda again did not show any marvelous performance in their interest cover since it was negative in 2011 of-0.38 times but they managed to slightly improve it to 1.15 times in 2012 to 11.2 in 2013. Even though they performed well, they weren’t s well off as Toyota IMC were in paying off their interest payments.

Dividend Cover

2011 2012 2013

-200000

-150000

-100000

-50000

0

50000

100000

150000

Series 1Series 2

IMC displayed positive figures in their Dividend cover as they paid huge amounts of dividends of Rs. 1.174 million in 2011 to Rs. 1.409 million in 2012 to Rs. 2.645 million in 2013, which resulted in their dividend covers to be 2.34 times in 2011, which further increased to3.05 times in 2012 but slightly declined to 1.27 times in 2013 due to a decline in their profits from Rs. 4.302 million in 2012 to Rs. 3.357 million in 2013. However paying off a lot of dividends and being able to do so is a big achievement, as it attracts a lot of new investors as well as current investors end up buying more shares, which increases the value of shares of a company.

Honda were not match for Toyota as they had incurred huge losses in 2011 of Rs. -2.48 million and Rs. -7.02 million in 2012, due to which they were unable to declare much dividends for their shareholders. There dividend cover was -31083.4 times in 2011 which further declined to -175534.7 times in 2012, but they managed to improve and bring it to a positive figure by 88095 times as they incurred a net profit this year of Rs. 7.92 million. Honda needs to improve a lot in earning huge Net profits, if they need to improve their dividend cover, and attract more investors, and thereby increase their value of shares in the Stock exchanges of Pakistan.

Earnings Per share

2011 2012 2013

-10

0

10

20

30

40

50

60

ToyotaHonda

IMC’s earnings per share were up to the mark as their EPs increased from Rs. 34.9 in 2011 to Rs. 54.74 in 2012 but slightly declined to Rs. 42.72. The highest EPS in 2012 was due to the highest Net income IMC earned that was Rs. 4.302 million, and as their net income declined to Rs. 3.357 million in 2013, their EPS declined as well.

Honda again did not manage to display better figures than that of IMC , as their EPS was negative Rs. -0.17 per share which further declined to Rs. -0.49 per share in 2012. This was due to the huge net losses they incurred in 2011 and 2012 of Rs. -2.48 million and Rs. -7.02 million. However they managed to slightly improve it to Rs. 0.56 per share as they incurred a net profit of Rs. 7.92 million in 2013.

Conclusion

After conducting the SWOT PESTEL and Financial Analysis, It was seen that Toyota IMC had managed to perform well and creating a Strong Brand name in highly competitive markets of Pakistan. Toyota displayed extremely good results as compared with its competitor Honda, and maintaining the second largest market share in the Automobile Industry of Pakistan. They have seen ups and downs in the last three years in their Sales Revenues and Profits, as compared with its own figures of previous years. However they still need to improve their Revenues and Profits, since they declined in 2013, due to various internal as well as external Economical factors. The decrease in Sales growth by 17 % cannot be expected by a company like Toyota, since this can result in the devaluation of its Shares, which would drive away investors as well as result in current shareholders, selling off their shares, if they continue with such a performance. They need to cut down their expenses, as well as cost of sales, in order to improve their Profits. Honda, even though did not reach the level of Toyota in terms of revenues and profits, still

managed to boost their sales and profits this year, which means if they continue to perform well, they can gradually end up increasing their market share.

Recommendation

I would give them the following recommendations in order to improve their financial performance for the future fiscal years, and maintain their market share in the markets of Pakistan.

It was seen that the major reason for the decline in their performance was the decline in their sales that ultimately lead to a decline to their overall performance. Toyota should Identify the reasons behind the decline in their sales revenue.

Since the economy is going down and inflation is going up, people may be switching to different and cheaper brands of cars, since the inflation has lead to an increase in prices of Petrol and CNG which is currently Rs. 113.24 for premier XL petrol, and Rs. 66.75 for CNG.

Although their cost of sales and expenses were seen declining in 2013, they should cut down more costs for a certain period of time, to maintain optimal level of profits.

Toyota is highly leveraged in an economy already having increased inflation, hence they should rely on alternate sources of finance, like issuance of new shares by conducting IPO’s, and also paying off most of their creditors. This way they can raise more finance and also balance of their Debt to Equity Ratio.

They also have a lot of money tied up in their long term loans and advances of about Rs. 131.337 million, taken mostly by their executives and employees, and also given to their suppliers. Although most of it is seen recoverable they should, start recovering money from them as early as they can.

They should also cut down their admin expenses which is currently Rs. 643.976 million. They should spend more on their advertising and marketing, coming up with better strategies,

which will help boost up their sales. They can offer campaigns such as free checkup and maintenance for a certain period of time, to

attract more consumers. Apart from their trade receivables, they also have money tied up in other receivables of Rs. 6698

million and Rs. 1557 million of loans and advances. They should start recovering these lumpsum amounts.

APPENDIX

References

References

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