EXECUTIVE SUMMARY

This study was aimed at understanding the impact on Auto sector has been growing mainly since the last three years due to huge demand and has witnessed a tremendous change in overall production, quality, delivery time and in confidence of the investor. Now the macroeconomic environment seems to be quite encouraging from the policy maker side but actually it’s not, why? Because of the fact that the policy makers either seem to justify themselves by thinking short term advantages or they are not thinking at all.

Introduction

Business Analysis using SWOT, composition of account heads, manpower, product trend, market trends

Financial Analysis using ratios, vertical and horizontal analysis, economic conditions, Basic forecast (if possible)

Macro Environment and Problems

Manufacturing is the second largest sector of the economy, accounting for 8.2% of GDP in 2005-06. Large-scale manufacturing, accounted for 69.9% of overall manufacturing, registered growth of 9.0% in 2005-06 against the target of 14.5% and last year’s achievement of 15.6%. The main contributors to the 9.0% growth in 2005-06 were the textile and apparel group (7.0%), chemicals (14.8%), petroleum group (2.3%), tires and tubes group (12.2%), non-metallic mineral products (9.5%), engineering goods group (6.5%), electrical items group (11.8%), and automobile group (29.8%); jeeps and cars (29.9%), tractors (16.3%), L.C.V’s (29.3%), motorcycles/scooters (15.0%).

The automobile industry is the largest segment in world trade. The annual size of the automotive exports has grown over US$600 billion, which accounts for about 10 percent of world exports. The auto industry in Pakistan is fast growing; this mechanical revolution has been aided in part to sound macro economic policies pursued during the last seven years.

At present the Pak Suzuki motor company is still enjoying its monopoly in the market of car manufacturers and the second largest is the Indus Motor Company, and Atlas Honda and  Dewan Motors covers the rest of the market share. The market of Pakistan is currently ruled by these four but there are some international companies of high repute that are considering the country a healthy investment place.

For instance Porche Motors have already started selling there high luxury vehicles in the country, Volkswagen, Renault are in process of consideration and recently a new Malaysian company named Proton Motors have started a month ago. In addition with this the local manufacturers have also introduced fully imported luxury vehicles for high end users, these cars include Camry, APV, Hilux, Accord, Coupe, BMW (dewan motors) and Mercedes.

Auto sector has been growing mainly since the last three years due to huge demand and has witnessed a tremendous change in overall production, quality, and delivery time and in confidence of the investor. Now the macroeconomic environment seems to be quite encouraging from the policy maker side but actually it’s not, why? Because of the fact that the policy makers either seem to justify themselves by thinking short term advantages or they are not thinking at all.

Since it has been announced by the government that the duty for completely knocked down units (CKD) from 35% to 32.5% and reduction of custom duty on import of completely built-up units (CBU) and both of these policy are still not seen in action as this would de-motivate the local manufacturers and in result the customers would have to have high price vehicles.  But still our local industry cannot fill the supply demand gap.

Some major problems for the auto sector are given below that are the main constraints in the sector performance and if resolved then the heavy growth in the sector could be achieved.

• Rising interest rates
• Import of used cars
• Lack of investment
• Technology constraints
• Rising oil prices

The above listed are some of the major problems that are being faced by the local manufacturers and are the main factors of the slow growth in the auto sector. A proper long-term policy should be provided by the government to aid the local manufacturers and also to attract new entrants in the market.  Currently the new entrants are the Adam Motors and the Chevrolet Motors that are followed by dewan motors who have brought the fully imported Mitsubishi Motor Cars in the country otherwise there is no new entrant from the local side except for foreign companies. The auto sector has still high growth potential as it has achieved about 29% of LSM growth and due to this foreign investment has been coming to enhance the plant capacity and the local manufacturers are running there plants on double shifts but still there is a need of the upper hand that would assist in fulfillment of the demand supply gap.

Although the vision for achieving the production to two hundred thousand units have been achieved but still its not filling the gap of huge demand and low supply, to bring the equilibrium in market government policy of the used cars imports have been aiding for a few days but the shortage of auto parts of these used cars made there selling much more slower and the importers are now at mercy of the customer or at the mercy of the government to reduce custom duty on import of auto parts in the country. The import of used cars also affected the local car manufacturers as they have to compete with these imported cars so they brought there own imported vehicles although this import would help them in providing the customer with more models and luxury vehicles but still the local manufacturing gets hurt by this and the end result would be heavy downsizing in the companies and slow manufacturing in the plants.

Contrary to the government’s expectations of a positive impact through duty reduction on import of reconditioned cars, Pakistan has already begun to face the aftermath of the government’s inconsistent policies. As one industry expert said, it is for the government to choose if they want Pakistan to develop a strong industrial base and make cars locally, or convert the Pakistani market into an international dumping ground for used and reconditioned vehicles. In the long term, actually even in the short term, the later is not in the interest of either the consumer or the country

The lack of long-term auto policy will have a negative impact on the growth of local auto industry. Help is needed to make Pakistan a global supplier of auto components and embodying incentives to facilitate research and development.  Import tariffs should be fixed to help promote manufacturing of cars and auto parts locally, while the government should encourage local and foreign investment for capacity expansion in order to meet the rising demand. But there should keep a balance between production levels of vendors and assemblers with continued governmental assistance

A positive factor that can be concluded by this policy is that if foreign companies like the Porche, Volkswagen e.t.c. started there own manufacturing facility here in Pakistan then there would be much more competition and high quality would be provided as well better after sales services from the current manufacturers because of extreme competitive environment. Also this has started to reduce the premium rates on local vehicles that were normally very high because of excess demand and because of consumer choice as well, the reduction in delivery times also has improved because of this import regime that was normally up to six to eight months is now two to three months and also the new entrants in the market has also provided the reduced rates and delivery times because of the same reason.

The growth perspective for the auto sector is higher as it seems that the production level is effective that is about 200K vehicles are being manufactured per annum and the vision is to produce 500K by the year 2010. Although there are problems but still the sector is performing with growth perspectives and there are some major factors for the achievement of such growth.

·         Rising income [purchasing power]

·         Consumer financing

·         Capacity expansion

·         Low steel prices

·         Appreciation of Pak Rupee v/s Japanese Yen

The purchasing power of the people has risen upwards as well as the demand for vehicles, and the interesting factor is that luxurious cars are being appreciated nationwide despite of their high prices, but atleast the local manufacturers are being utilized by the people to provide better quality and better after sales services.

Besides this, the major increase in production and sales is also due to the increased consumer financing opportunities provided by the financial institutions to increase their businesses as well as the auto sector gets a booming growth in the last three years because of the competitive financing activities. Capacity expansion is done in almost every company of the sector due to heavy demand faced by the local manufacturers also the companies are now working on double shifts since last year to reduce the gap between supply and demand.

Other than these major factor international steel prices have been decreased and because of that manufacturers are now being able to produce more vehicles and can buy raw material at lower prices than before and also the appreciation of Pak rupee against Japanese Yen is another factor of the growth in sector as the imports from the mother company becomes a little less costly.

 

IMC VISION AND MISSION STATEMENT

"IMC’s Vision is to be the most respected and successful enterprise, delighting customers with a wide range of products and solutions in the automobile industry with the best people and the best technology".

• The most respected.
• The most successful.
• Delighting customers.
• Wide range of products.
• The best people.
• The best technology.

Mission of Toyota is to provide safe & sound journey. Toyota is developing various new technologies from the perspective of energy saving and diversifying energy sources. Environment has been first and most important issue in priorities of Toyota and working toward creating a prosperous society and clean world.

MANAGEMENT POLICY

We as a team at Indus Motor Company are committed to comply with the requirements of our Integrated Management System and to endeavor to continuously improve upon it in order to:

Manufacture high Quality Products.
Generate Customer Satisfaction.
Provide Service to the Society.
Maintain Market Leadership.

Identify and avoid/mitigate those environmental aspects which have negative environmental impacts. Comply with all applicable legal, regulatory and other requirements related to Environment, Health and Safety,

Assist society by making the environment more friendly.
Design and maintain facilities, establish systems, provide training and conduct operations in a manner that safeguard people and property.
Identify, evaluate & mitigate health risks related to our operations that potentially affect our employees, contractors and the public.
Action Commitment Teamwork for becoming # 1 in Pakistan”
means a committed team to make Indus # 1 in:

• Respect and Corporate Image
• Customer Satisfaction
• Quantity in Production & Sales
• Quality
• Profitability
• Best Employer

HISTORY

Indus Motor Company (IMC) is a joint venture between the House of Habib , Toyota Motor Corporation Japan (TMC) , and Toyota Tsusho Corporation Japan (TTC) for assembling, progressive manufacturing and marketing of Toyota vehicles in Pakistan since July 01, 1990. IMC is engaged in sole distributorship of Toyota and Daihatsu Motor Company Ltd. vehicles in Pakistan through its dealership network.
The company was incorporated in Pakistan as a public limited company in December 1989 and started commercial production in May 1993. The shares of company are quoted on the stock exchanges of Pakistan. Toyota Motor Corporation and Toyota Tsusho Corporation have 25 % stake in the company equity. 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 art technologies. To ensure highest level of productivity world-renowned Toyota Production Systems are implemented.
PRODUCT LINE
IMC's Product line includes 6 variants of the newly introduced Toyota Corolla, Toyota Hilux Single Cabin 4x2 and 4 versions of Daihatsu Cuore. We also have a wide range of imported vehicles

COLLABORATION FRAMEWORK

EQUITY Toyota Motor Corporation Toyota Tsusho Corporation House of Habib BUSINESS TOYOTA GROUP Technology & KD Parts Materials, Parts & Logistics Support Technology KD Parts Hilux Frame & Deck

MANUFACTURING  FACILITIES

Just in Time spirit implies two opposing forces of providing fast and flexible response to customers, yet building efficient mechanisms and systems that are efficient and waste-free.

The concept is to provide the right product and information, at the right time, in the right amount, in the right manner, while maintaining high standards of efficiency and cost control. We have to practice this contradictory idea in our daily activities.

AUTO SECTOR IN PAK

Automobile sector is one of the fastest growing sectors in Pakistan. It contributes towards the nations economy in the form of Technology Transfer, Employment, Investment and much more. Automobile sector contributed over Rs.23 billion to the national exchequer in the year 2003-04.

As the industry's growing, so are the Automobile companies. Every manufacturer is in the process of increasing production capacity to meet customer demands. Through out the 90's the annual automobile production remained constant around 45,000 but due to consistent policies and positive macro economic conditions the industry boomed to over 120,000 units/annum in just 4 years.

For statistic of the Automobile sector please visit Pakistan Automobile Manufactures Association's website: http://www.pama.org.pk

INVESTOR RELAATION POLCIY

Objective
To maintain an active and open dialogue with the security analysts, shareholders and potential investors regarding the Company's historical performance and future prospects.
Policy Statement
I MC is committed to fair disclosure of the Company information without advantage to any particular investor or analyst and seeks to provide current and potential shareholders with appropriate information necessary to make reasoned and informed decisions about investment in IMC equity.
Our Investor Relations –IR Policy:
(i) prohibits the selective disclosure of material, nonpublic information about the Company,
(ii) sets forth procedures designed to prevent such disclosure, and
(iii) provides for the broad, public distribution of material information regarding IMC.
At all times IMC will guard the Company's need for confidentiality about key business and operating strategies & SECP's directive on nonpublic earnings guidance.

Research Design and Methodology

The research design and methodology would be simple as defined in the phase 1 of the project. We would be studying the financial statements of the company to identify major cost centers and their impact on the production levels as well as the final affect on the operational profitability.

The data collection methods would be the same as well, however would be defined in details later on. The overall design of the research would be subjective with use of quantitative evidence (i.e. Financial statement references, internal information (where possible) and industry data retrieved from various market sources)

Population of Research Project

There would not be any specific population selection in this research; however, there might be a possibility of asking questions to relevant personnel that would have a direct impact on the conclusion of the research.

This is for the reason as this is a case study; the sample population may comprise of people working in the concerned departments but then their views of the CVP impact might not portray the actual results available in Financial statements, also the financial statements doesnot always answers’ every qualitative question therefore the population could have people like the Financial controller, Manager Finance and Manager Costing.

Our population for the project would be all the cost centers working under the head of expenses in the accounting tree of the company; however we will select the major impact occurring units for the ease of study as there is a clear limit of time for the research.

Sampling Procedure

There is no sampling procedure in this research, as the reason is explicitly written in population of research. Although the theme of sampling could be alike cluster sampling where cost centers are referred to as various clusters.

Our main focus is to find the impact making factors on financial decision making. For this our sampling procedure is for data collection only and to further analyze the possibility of cost effective majors that can impact the bottom line of the company.

The Sample

Sample would be the financial statements for Indus Motor Company Limited for the last three years that is from 2008 to 2010. The sample would then be further classified via fixed and variable costs, and further classified in to revenue generation and productivity centers. The sample might include research from industry sources as well.

Instrumentation

As stated earlier, information would be derived from the data of financial statements of three years, industry data and descriptions from the reports.

Various calculation methods as described in techniques for decision making stated in phase 1 would be applied and conclusions from them will answer our research objectives. The profit and loss statement would play the most vital role in conclusion along side would be the inventory information from the balance sheet that is also very crucial for justification of conclusion.

Data Collection

Data would be collected from financial statements of the year 2008, 2009 and 2010; also industry specific data would also be collected through various sources

Specific information includes Sales for Indus Motor Company Limited and various major revenue centers like Product Divisions and Spare Parts. Operational cost having major cost centers like material, salaries, power etc. Changes in assets and liabilities are also counted for the impact on financial decision making. Competition data is also retrieved on limited disclosure basis for necessary perusal.

Ethical Consideration

Due to the fact that management is not comfortable in sharing internal financial accounts of the company, we have taken published financial statements and other relevant data from market sources that are authorized and authentic in nature. For relevant industry data, reports from reputable research houses and authorities are selected that will be enclosed with annexure and appendices.

Data Representation

Representation of data would be through demonstrated techniques for decision making such as: contribution of accounts as per criteria chosen (sales or assets); trend analysis, and necessary ratios with supported charts and tables. Along with numbers there would be grids for SWOT and other qualitative factors.

Also comments on the strength and weaknesses of the techniques mentioned, the impact of the decision-makers attitude to risk on the decision making process would form an overall part of representation.

Procedure for Answering Research Questions

To develop a good understanding of knowledge required and techniques; available to enable managers to measure and manage business performance within the organization. The following procedures are to identify both financial and non-financial measures of performance that would be used to answer our research questions.

• understand how performance measures (from ratios) should be linked to overall organization strategy
• identify and apply techniques that aid decision making
• identifying techniques to evaluate decisions in relation to: costing, pricing, product range, marketing
• strategy for purchasing and production strategies (identified from Reports of management)

Analysis of Data and Interpretation of Results

Introduction

As discussed in the prior chapter, data is retrieved from the published financial statements for the last three years; we will begin our analysis with the following pattern.

1. Composition of the Financial Statements
2. Business Analysis supported with SWOT grid and other measures
3. Vertical and Horizontal Analysis w.r.t Trend analysis
4. Production Capacity
5. Cost Centres Vs. Revenue Centres
6. Risk factors

We will be using financial ratios analysis at a very limited scale for the fact that this report is focused on the business analysis in concern to Improvement in cost measures mainly, and thus a full scale ratio analysis is not done.

General Description of Data

The revenue generation comes from mainly the two categories of business units namely manufacturing and trading under that there are the three main business units running in the Indus motor company, that is the CKD (Completely knockdown units), CBU (Completely Built Units) and last but not least the Auto spare parts business. The CKD segment currently caters two products mainly Corolla and Cuore. The CBU segment caters mainly four products Camry, Hilux4x4, Landcruiser and Hiace.

 

                                                                                                                Competition Chart for Indus Motor Company

Small-High segment __ CKD Passenger Car

The CKD segment includes the production of the market leader in 1300CC variant, Toyota Corolla; there are mainly four competitors when it comes to 1300CC to 1800CC variant. Corolla leads the small-high segment of the market, while Honda City the second, followed by Honda Civic and Suzuki Liana.

The yearly pattern of the Small-High segment signifies the higher demand of Corolla in the Pakistan market than any other cars available including the imported cars. By analyzing the sales pattern, it is obviously clear that the industry’s total sales for year on year basis have declined until this year mainly on Corolla’s account.

Corolla’s sales has reached the highest mark in the year 2010 (43,382 units) after its cumulative decline of 25% since the year 2007 with annual sales of more than 35,000 units.

The decline in the market  leader’s sale was mainly the after affects of the economic slowdown faced by all other automakers as well, also it was on the account of much awaited new model that was received amazingly as it turns the picture of the whole Small High Segment towards a positive stance.

The main business of the IMC comes from this single business segment serving as market leader since last five years.

The main push for the small-high segment started from the 2^nd quarter of FY09, where IMC and Honda played the key role in reviving the growth with their high quality products. With Corolla’s new model success, Honda also launched their new model for Honda City in 2009, however due to higher price and lesser demand Honda remains second in competition.

The industry still needs much attention from the government, although one of the other driving factors was the imposition of import duty on used cars that reduced the incoming competition. Above all, Indus Motor Company is the only company in the region that stood among the highest in selling corolla.

Economy Segment __ CKD Passenger Car

The other product of the CKD segment s the 800CC variant Cuore, that competes with only one competitor that is the Pak Suzuki Mehran. Yearly pattern for the sales exhibits a significant decline of the segment and especially for the Cuore where sales has decreased to more than 50% and still decreased by 500 units in FY2010.

The main reason for the decline in sales is the higher price of the variant because of higher quality compliance in comparison with others including Mehran, also it was on account of the downsizing of prices in march 2009 by the competition that even make some variants of 1000cc models priced equal to the price of Cuore and last but not the least there was a limitation to the availability of CKD kits.

As of now a new variant of the product had been launched that includes automatic transmission as well as it runs on CNG named as ‘Ecomatic’. The segment has been facing a downward trend since 2 years, however demand for economy segment has increased, one of the reason being the import of economy cars has been on the second highest scale especially with the introduction of 600cc variant.

CBU Business Segment

The CBU units are the market leaders in their respective segments because of the fact that besides the luxury segment there is not much competition available in comparison with product and the quality of that product.

Indus motor company introduced the luxury car segment in 2006, that gathers more than 15 percent of the market share in its first year launch, however afterwards the demand for luxury cars slowed in 2007 because of the import duties that were levied by the government; but the demand for Camry grew even higher when the worldwide launch of the new Camry model was introduced in Pakistan as well. Also the new model of Hilux and Hiace(Van) was introduced in the same year that were already at the peak of their demand and by 2008 Indus has attained a total market share of more than 85 percent in the CBU segment that includes Camry, Hilux 4x4, Hiace van and Landcruiser (SUV).

The IMC imported vehicles are recognized as the industry leader because of the highest quality standards that are maintained by the company in order to continuously increase their market share. Although the custom duty of 150% resulted in more than 50% decline in IMC sales, despite the fact that the used imported cars are also mainly comprised of the Toyota brand, however, the IMC sales for the segment just increased by 2 units during the year 2010.

SWOT ANALYSIS

The internal and external assessment of the company resources was done via financial statements also using the director’s reports and financial analyst briefings published by the company.

Strengths	Weaknesses
1.   Market leader in 1300-1800 cc passenger cars as well 4x4, Pickups, Vans and buses 2.   Capacity expanded to 53040 units per annum 3.   Continuous product development 4.   Huge product line catering to almost all market segments 5.   Increased quality, profitability, transparency and customer preference 6.   largest producer of corolla in South Asia 7.   Improved MIS with online chassis punching and highly trained and professional workforce including employees, vendors, etc 8.  Very strong image of listed common stock because of persistently increasing EPS and building investor’s confidence through effective payout policies	1.     Low production capacity compared to competitor production capacity 2.     Still High prices of spare parts due to no mass production and small vendor base 3.     Economies of scales still not achieved through lowering distribution expenses 4.   Competency in 800 CC domains still not achieved although lowered
Opportunities	Threats
1.     Bring new product line because of saturated demand for current models 2.     Continued gap of supply and demand 3.     Expansion plans to reduce delivery time 4.     Auto parts business enhancements 5.     Seek out export window for products like Vans and coasters as well as parts of corolla 6.     Appreciation of Pak Rupee against Japanese Yen	1.    Rising energy and fuel prices 2.    Import of used cars 3.    Tax structure 4.    New entrants especially international competitors 5.    Rising interest rates 6.    Capacity expansions by competitors 7.    Technology constraints 8.    Increasing price of steel and other metals used.

Financial Analysis for Indus Motor Company

The overall performance of the company is quite overwhelming, however due to the slowdown in industry the company balance sheet depicts a decline in the total size of the company but at the same time the fundamentals of the company remained strong and thus glimpsing a good future of the company. The company despite recession in the economy is in continuation of the aggressive marketing strategies along side with the continuing expansion plans as the company has mission to achieve 100,000 units per year mark by the year 2012.

The company’s capacity utilization ratio signifies the authentication of the fact that the aggressive strategies of the company is paying off with flying colours; the sales ratio as a percentage of production never decreases than 100 percent.

Comparing IMC with its major competitors clearly signifies why this company outperform in the industry, it is explicitly clear that company’s inventory management is much more efficient than its competitors.

UTILISATION %	2007	2008	2009
IMC	90%	91%	65%
Pak Suzuki	81%	60%	34%
Honda Cars	36%	30%	26%
SALES / PRODUCTION %	2007	2008	2009
IMC	106%	105%	103%
Pak Suzuki	42%	56%	69%
Honda Cars	103%	103%	98%

The income generation capacity of the company is still intact despite slowdown in the economy as the company is able to make higher sales than last year. This is on account of high demand of products and higher prices as well. Also the company has doubled its fixed assets in 2008 that shows a healthy sign for expansion, however it also increased the non-cash expenses for the company.

The company was able to reduce its liabilities very significantly in 2008 that lowers the risks of the financial position of the company, although due to high demand of the products there is a huge increase of advances from customers and dealers.

.

The income disbursement that is the dividend payout has been the highest this year at Rs.15/share although it had been lowered in the year 2008, as the company retained more profit in order to reinvest for the capacity expansion plans. The earnings per share of the company also decreased because of the lowered income after tax due to inflationary impact on expenses also the company has to bear higher than before taxation in the year 2008. The earnings retention rate also enhances the book value of the company and its revenue per share.

Financial Position Analysis

The company’s financial position has become much more stable as the management policies are very well intact with the economic scenario prevailing in the country, also the aggressive expansion policy along with stable working capital coverage depicts the stronger position of balance sheet for the upcoming years.

The equity had been reduced to 46 percent from 68 percent in 2008 mainly on account of higher payouts in 2009 and 2010; with the highest dividend payout of PKR 15.00 per share the company is able to retain better profits. The company does not hold any interest bearing liability except for the payments of assets subject to financial lease. The company is charged 7 percent per annum that counts for a negligible affect on its liabilities.

Common Size Analysis	2008	2009	2010	2011
PAID UP CAPITAL	5.72%	3.80%	2.90%	2.93%
RETAINED EARNING	62.92%	45.98%	43.49%	49.69%
TOTAL EQUITY	68.64%	49.78%	46.38%	52.62%

The current liabilities have increased to 52 percent as the advances received by the company from customers in respect of sale of vehicles due to higher demand as exhibited earlier.

Common Size Analysis	2008	2009	2010	2011
LONG TERM LIABILITY	0.00%	0.00%	0.00%	0.00%
DEFFERED LIABLITIES	3.87%	2.44%	1.20%	1.69%
TOTAL LONG TERM LIABILITIES	3.87%	2.44%	1.20%	1.69%
A/C PAYABLE	20.32%	19.06%	21.76%	21.39%
TAXATION	0.00%	0.07%	0.89%	0.00%
OTHER CURRENT LIABILITIES	7.17%	28.65%	29.76%	24.30%
TOTAL CURRENT LIABILITIES	27.49%	47.79%	52.42%	45.69%
TOTAL LIABILITY	31.36%	50.22%	53.62%	47.38%

The capital expenditure in the plant and equipment increased the long term assets to 29 percent that is about an increase of 92 percent in 2008 as compared to 22 percent increase in 2007. However, presently the Capital WIP has been almost completed and the Core assets are now reduced to 12 percent of total assets.

The expansion regime started off mainly in 2003 when IMC started working on double shifts, since then the company increased its manufacturing assets by 72 percent in 2006. The cash balance of the company has nearly doubled in 2010 that shows a healthy sales cycle also the investment mindset of the company’s management.

Common Size Analysis	2008	2009	2010	2011
CORE ASSETS	29.34%	19.02%	12.25%	15.75%
LONG TERM INVESTMENTS	0.00%	0.00%	0.00%	0.00%
OTHER LONG TERM ASSETS	0.36%	0.17%	0.08%	0.08%
TOTAL LONG TERM ASSETS	29.70%	19.19%	12.33%	15.83%

The current assets of the company have been raised to more than 80 percent in 2010 as compared to 70 percent in 2008, the main driver being increasing cash balance over the period. The efficiency is achieved in inventory management, as the company was able to sold its units in slowing economy currently the inventory contributes about 20 percent on average basis, the increase is primarily on account of higher cost of the products. Accounts receivables had been increased by just 0.3 percent in 2010 as compared to a increase of 28 percent in 2008, this is primarily on account of increased credit sale to government agencies in 2008 that is secured but takes time. However, this is alarming on weak recovery account.

The increase in other current assets has been witnessed at more than 50 percent in 2008 contributing about 7 percent in total assets, this is due to the fact that the amounts delayed from related parties including banks, suppliers and some taxation amount that has been deferred and is to be finalized by the taxation agencies. Although since 2009 it is decreasing on average of 4.4 percent per annum.

Cash and bank balances have been increasing on average rate of 90 percent since 2009 contributing more than 50 percent of the total assets. In 2008 the composition reduced to 31 percent that translates a decrease of 49 percent due to the expansion plans of the company, as it is explicitly clear that the company is exercising its excess liquidity in a very decent management manner. Also the expansion of 3s dealer network and the Spare parts business is one of the other reasons for the heavy cash balance.

Common Size Analysis	2008	2009	2010	2011
INVENTORY	20.87%	20.39%	19.57%	21.67%
A/C RECEIVABLE	10.24%	8.72%	6.67%	5.55%
OTHER CURRENT ASSETS	7.31%	4.65%	3.37%	5.15%
SHORT TERM INVESTMENT	0.39%	0.00%	0.00%	18.40%
CASH AND BANK	31.48%	47.04%	58.06%	32.47%
TOTAL CURRENT ASSETS	70.30%	80.81%	87.67%	83.23%

The structure of the balance sheet looks very strong as the company has 46 percent financing through equity with liabilities of non-interest bearing nature and more than 70 percent liquid assets, the higher demand of the product line would be well placed with the expansion plans translating in efficient turnovers and higher return over the future years.

Profit and Loss Analysis

The company sales made yet another record high in the year 2010, after a setback of 8 percent in 2009, IMC returns with more than 50 percent in revenue that supports the ability of the management planning even in the slowdown era of industry. This was mainly on account of slow down in the economy and increased prices of the vehicles due to the 5% FEDError! Bookmark not defined. imposed by the government, however sales also grew by the spare parts business and it is showing promising future prospects.

Common Size Analysis	2008	2009	2010	2011
SALES	100.0%	100.0%	100.0%	100.0%
RAW MATERIAL CONSUMED	71.6%	78.6%	78.8%	84.3%
LABOUR	0.7%	0.8%	0.6%	0.8%
ENERGY COST	0.3%	0.3%	0.3%	0.3%
OPERATING CAPEX	1.6%	1.5%	1.6%	1.8%
OVERHEADS	2.2%	3.8%	3.4%	3.4%
COST OF GOODS MANUFACTURED	76.4%	85.0%	84.2%	90.9%
STOCK (NET)	14.4%	8.8%	8.0%	4.9%
COGS	90.7%	93.9%	92.2%	95.9%
GROSS PROFIT	9.3%	6.1%	7.8%	6.8%
OTHER INCOME	1.9%	1.9%	3.0%	2.5%
ADMINISTRATIVE EXPENSES	0.7%	0.9%	0.6%	0.8%
SELLING & DISTRIBUTION EXPENSES	1.2%	1.2%	0.8%	1.1%
FINANCIAL CHARGES	0.0%	0.1%	0.0%	0.1%
OTHER CHARGES	0.7%	0.4%	0.7%	0.6%
PBT	8.5%	5.4%	8.7%	6.7%
TAXATION	3.0%	1.7%	3.0%	2.1%
PAT	5.5%	3.7%	5.7%	4.6%

The Cost of Goods sold has increased by more than 50 percent that increases the total composition to 92 percent in 2010. The inflationary impact on the raw materials and overheads leads to the decrease in gross profit by 39 percent in 2009 and 13 percent in 2008, however, in 2010 more than 100 percent increase is seen GP mainly on account high sales and efficient cost and inventory management making contribution of 7 percent. The main concerning issues regarding the increase in cost of goods is because of the increase in material prices and increased purchases on YoY basis, the labour wages and other overheads. The higher demand of the products that is translated with higher inventory levels with advances from customers outstanding are well managed and with huge cash balance it is explicit that company’s management tactics are effective and efficient.

The income before tax was decreased by 16 percent on account of lowered gross profit and other income as well in 2008. Taxation charges had been decreased by 15 percent in the year 2008 on account of deferred payments due to plant expansion translating a decline in net income by 16 percent as well.

In 2010, highest profit after tax was booked with more than 150 percent growth in PBT and more than 148 percent growth in PAT, on account of better gross margins and other cost effective majors took by the management.

Financial Ratio Analysis

Liquidity management

The liquidity situation of the company is very much intact, as illustrated by the ratios in the following table. The current ratio has been decreasing year by year, reason being the increase in account of advances from customers due to higher demand of IMC’s products. Although it is still more than 1.5, also with higher cash margins the position is well enough to mitigate any foreseen risks in liquidity.

There is still a small backdrop by the company of having higher inventory level, because the industry is already in slowdown state, the demand for automobile has been hit hard due to rising sale price, however the company holds a debt free structure in order to stay safe from the short term financial obligations. This has become explicit by looking at the quick ratio year on year based, the cash balances are increasing year by year in order to mitigate with purchases and expansion opportunities to meet higher demand.

Asset Management

The working capital requirement was very well planned as the graph exhibits; the business cycle of the company has been on progress after 2009 as the demand for product gets high and also the financial position of the country got better, that resulted in better purchasing power of the costumer and consumer thus improving the DSO and inventory turnover impressively.

As the operating cycle improved, the fixed asset turnover also depicted an increasing trend, probably on account of the fact that fixed assets are acquired earlier when there costs were low, whereas the additions to these facilities were the only new reporting that includes the affect of economic inflation, price increases etc.

As a result the company was well prepared to meet high demand that resulted in significant improvement in Asset turnovers.

Profitability Management

The earning power of the company is much stronger if the tax obligations are reduced to analyze the potential. Since the auto assemblers pay very large amount of tax the profit margins reduced much sharply. The primary source of increase or decrease in earnings power is the ability to efficiently use the inventory budgets when the material ordering is done. The lowered the CGM the better the earnings for this company. Better gross margins were achieved due to higher sales and better cost efficient measures.

The return on assets of the company is very much stable depicting the quality of income is accordingly sufficient. The minimal decrease is because of the doubled number of core assets in 2008, however the return on equity is on a increased significantly, this is due to the fact that higher retained profits are appropriated for the year 2010, also it bodes well with the ongoing expansion policy of the company, despite high payout of PKR 15 per share.

Answering Research Questions

Our initial purpose of this case study was to develop a good understanding of knowledge required and techniques; available to enable managers to measure and manage business performance within the organization. Both financial and non-financial measures of performance are included in this paper.

• understand how performance measures should be linked to overall organization strategy
• identify and apply techniques that aid decision making
• identify and implement appropriate costing systems and business control systems
• identify and apply techniques to evaluate decisions in relation to: costing, pricing, product range, marketing
• strategy, purchasing and production strategies

In a nutshell, our research was mainly focusing on three factors

1.                  Cost reduction establishments

2.                  localization of material to reduce production costs

3.                  finished goods imports reduction

All of these questions were answered above, however the main revenue and cost centres still remain the point of concern for upcoming years to come as Pakistan is struggling with various economical issues that are not favourable with the auto sector.

Hypothesis-by-Hypothesis presentation and analysis of data, and the interpretation of results

Hypothesis 1

Ho: Efficiency in Gross Margin can be increased with efficiency in production cost and volume

As we can see from the below mentioned table, the company is already running on full strength of its production capacity.

	2008	2009	2010	2011
INSTALLED CAPACITY	53,040	53,040	53,040	54,800.0
PRODUCTION	48,222	34,298	50,557	50,759.0
Volume Sold	50,802	35,276	52,063	50,943.0
UTILISATION %	91%	65%	95%	93%
SALES / PRODUCTION %	105%	103%	103%	100%
SALES / Capacity %	96%	67%	98%	93%

As a result, IMC has already achieved improvements in its gross margins i.e. from 6.1% to 7.8% in the year 2010, however there are some costs that can held the margins back due to various economical factors such as inflation, exchange rate parity, taxation etc.

On the production side, IMC is leading the auto assembler market very prominently as seen in the business analysis segment earlier.

Hypothesis 2

Ho: Efficient techniques in business costing can result in better operational planning

It is very clearly written in the director’s report and other industry resources that IMC is one of those companies that encourages local manufacturing as much as possible with complying quality standards, however the production costs increases with such concern. The most obvious reason is the purchase cost of the material due to inflationary impact on the whole supply chain, however IMC was able to almost sustain the same level if not lessen significantly.

Common Size Analysis	2008	2009	2010
SALES	100.0%	100.0%	100.0%
RAW MATERIAL CONSUMED	78.6%	78.8%	84.3%
LABOUR	0.8%	0.6%	0.8%
ENERGY COST	0.3%	0.3%	0.3%
OPERATING CAPEX	1.5%	1.6%	1.8%
OVERHEADS	3.8%	3.4%	3.4%
COST OF GOODS MANUFACTURED	85.0%	84.2%	90.9%
STOCK (NET)	8.8%	8.0%	4.9%
COGS	93.9%	92.2%	95.9%

One big figure that was of the running royalty that has doubled from the prior year to reach a billion mark. If we even reduce it by 25%, the gross margin will reach to 85.75%, the same is with the stores and spares account.

The localization of parts manufacturing would not only bring reduction in these costs but will also generate new employment opportunities that will overall improve the industrial sector of our country and bring the sales prices down as there will be an explicit reduction in FED tax as well.

Summary of Findings

The main driver for the IMC’s performance is Corolla throughout the years taken for study, however with increasing competition and capacity expansions by the competitors would provide in difficult situations for the company, and thus has to increase the market share of other product lines as well to expand the existing facilities with the increased cash balance at hand.

Cost drivers were mainly Material cost and finished good inventory, however the company has been improving its credit sales and finished good inventory management but needs to be better and efficient due to increasing inflationary impact and reducing buying power of the consumer.

IMC has already introduced new products in trading business; however the contribution in total sales is still not significant. If this is improved then the company can benefit higher income without affecting its existing manufacturing line, also it will help increase the market share of the company.

Discussion, Summary, Conclusions and Recommendations

IMC has been the market leader for the last five years in a role, however the company has faced tough times like its peers and is coming on top of every obstacle, although it still has a long way to go to go especially in concern to capacity expansion as its peers are continuously making heavy investments in the same.

IMC has been efficient in not only improving its cost and revenue centres but also sustained to be better than prior years and hopefully for the future as well. The following concerns and risks would be affecting the IMC figures for the year 2011 and upcoming as the whole economy is shifting.

Increasing car prices

The company has already pass down the increased material cost to its customers with aggressive marketing strategies to gain through volumetric sales measures and is successful in doing so.

Steel prices

Material cost has a direct impact from steel prices as it has recently touched its all time high of USD 1,275 per ton. The commodity prices have already comedown to reasonable levels but still there is a concern that the same could be reached.

Rupee depreciation Vs Localization

For IMC its not a major concern as the Rupee-Yen depreciation is not much this year, although the impact on the material cost can be alarming as the suppliers of IMC have to have concern regarding this. Also there is a possibility of localization of material, as the current model of Corolla is already at more than 65% localized levels, likewise if the Cuore can be shifted to the same not only the price will reduce but its demand would be greater than ever due to the better quality maintained.

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