Vehicles: INDUS MOTOR COMPANY LIMITED - Analysis of Financial

Statements Financial Year 2005 - Financial Year 2010

OVERVIEW (December 15, 2010) : Indus Motor Company Limited is an assembler, manufacturer and
marketer of Toyota vehicles in Pakistan since July 01, 1990. The company is engaged in sole distributorship
of Toyota and Daihatsu Motor Company Ltd vehicles in Pakistan through its dealership network.

Indus Motor Company (IMC) is a joint venture between the House of Habib, Toyota Motor Corporation
Japan (TMC), and Toyota Tsusho Corporation Japan (TTC). Indus Motor Company was incorporated in
Pakistan in 1989 and is listed on all the stock exchanges of Pakistan.

The Indus Motor Company Limited has a market share of 41%, Pak Suzuki (market share: 46%). Thus Indus
Motor Company is one of the two leading car manufacturers in Pakistan. The market share of Pak Suzuki
declined to 46% in FY10 from 48% in FY09. Dewan Motor's market share also decreased from 0.38% in
FY09 to 0% in FY10. However, Indus Motor and Honda Atlas gained in terms of market share. Honda Atlas'
market share increased from 12.22% in FY09 to 12.49% in FY10.

Indus Motor Company performed better than the other companies in the auto sector during FY10. The
market share of Indus Motor surged from 39% in FY09 to 41% in FY10. This company managed to widen its
market share.

Auto industry that witnessed a 67% decrease in volume over the last couple of years bounced back in FY10
with Indus Motor, in particular outperforming the industry average.

The automotive industry proved to be a key driver for the large scale manufacturing sector that recorded a
growth of 4.7% compared to 8.2% decline in the previous year. In 2009-10, the industry demand for the
locally manufactured Passenger Cars (PC) and Light Commercial Vehicles (LCV) grew by 43% to 141,654
units as compared to 99,310 units in 2008-09. The overall production increased by 37% to 138,587 units
versus 101,400 units in the corresponding period of 2008-09.

Surprisingly, the demand for the locally assembled Passenger Cars (PC) and Light Commercial Vehicles
(LCV) increased by 9% to 33,687 units for the first quarter as compared to 30,787 units sold for the
corresponding period in 2009. During the quarter, the automobile industry faced acute inflationary pressures
due to rise in input costs and continuous depreciation of the rupee against the yen and US dollar.

The combined sales of Toyota and Daihatsu brands for the quarter recorded an increase of 14% to 12,114
units compared to 10,631 units sold for the same period last year representing an increase in market share
from 32% to 34%. Correspondingly, the production of PC and LCV for the quarter ended September 2010
also increased by 15% to 12,186 units as against 10,576 units produced in the same period in 2009. On the
financial side, the Company's sales revenue of the CKD, CBU and parts business grew by 20% to Rs 14.3
billion over Rs 11.9 billion, however, the profit after tax was down by 24% to Rs 577 million from Rs 759
million for the same period last year. The cost of sales increased however by 22% due to reasons
mentioned above, pushing down the Gross margin downwards. Administrative and selling expenses
increased by 22.5%. Other operating income remained more or less at last year's level. Finance costs,
however, escalated and showed an increase of more than 1400%. Reason was the loss of Rs 102 million on
revaluation of forex contracts.

Going forward, it is expected that because of the permission to import 5-year old re-conditioned cars will
have a negative impact on the automobile sector. The demand will be hit, and the manufacturers may be
forced to reduce prices. With the continuing depreciation of the rupee against yen, the costs will remain high
and pose pressures for the industry.

RECENT RESULTS - FINANCIAL YEAR 2010

As compared to FY09, the net sales for FY10 rose by 37%. This was due to both, increase in manufacturing
and increase in trading for the company. The increase in demand is mainly attributable to the combined
effects of a healthy agricultural income for the farming community and a small increase in auto financing.
This has occurred on a low volume base for the previous year, which had suffered from the dampened
demand due to the extraordinarily difficult economic conditions in the country and also from the absence of
the newly launched Corolla for part of the year on account of the run out of the old model. The Federal
Budget 2009-10 brought good news for the auto industry in terms of the abolishment of the 5% excise duty
on cars with an engine capacity in excess of 850cc, which was immediately passed to the customers
through a price

The cost of sales for the period, are 35.93% higher, which is due to higher volume. However, the gross profit
had a two-fold increase.

With respect to the distribution costs, there was only a slight decline whereas the administrative expenses
increased by around 8%. This was mainly due to the rise in salaries, allowances and other benefits as well
as staff training costs.

Other operating expenses rose by 62% mainly because of increase in worker's welfare fund which increased
from 41 million to 112 million. Workers' profit participation fund rose from 108 to 281 million in FY10. On the
other hand, operating income rose by 60 % because of a rise in return on bank deposits from 628 Million to
1611 Million. Also the liabilities no longer payable were written back which increased from 16 million in FY09
to 97 million in FY10.

The finance costs for the company decreased by more than 6 folds. Although the markup on advances from
customers rose from around 8 Million to 77 Million, there was also a simultaneous increase in unrealised
gain on revaluation of foreign exchange contracts from 3 Million to 96 Million, causing an overall decrease in
finance costs for the company.

Thus, the overall result for the company was an increase in profit after taxation of around 60% from 2046
million in FY09 to 5242 million in FY09.

PROFITABILITY

Gross profit margins fell drastically from 11.37% in FY07 to 9.29% during FY08. The gross profit margin of
the company decreased due to 13% lower gross profit earned during FY08 as compared to that posted in
FY07. The sales revenue of the company had increased by 6%, however, there was a more than
proportionate (8.5%) increase in cost of sales. During FY08, Indus Motor Company, along with the overall
auto sector suffered largely due to appreciating Japanese yen against Pak rupee and higher steel prices.

The net profit margin of the company also decreased during FY08 due to 16.6% lower Profit after taxation
posted by the company. The administrative expenses had increased by 12% in FY08. Also, the other
operating income fell by 17.7% due to due to low returns on bank deposits. Finance charges for the
company had decreased by 94% during FY08 as the company did not have any markup bearing long-term
liabilities, except deferred taxation, in its balance sheet.

During FY08, the Return on Asset ratio of the company fell to 16.6% after having risen to 17.5% in FY07.
The ROA fell, despite a 12% decline in assets. Lower Profit after taxation for the period translated into lower
ROA and a sharp decline in Return on Equity (ROE) for the period.
FY10 was a better year for the company in terms of its profitability. After a constant decline in return on
equity since the last 4 years, ROCE increased to 27.3% after a mere 13% in FY09. This was basically due to
an impressive increase in the net income for the company in FY10 due to aforementioned reasons.

Gross profit margins, net profit margin and return on asset slightly increased in FY10 from FY09 position
although the return on asset is still lower than FY08 position. This is because of a substantial increase in
assets for the company, especially the stock-in-trade and cash balance. The total assets have increased by
more than 100% from FY08 to FY10.

DEBT MANAGEMENT

The debt-asset ratio decreased from 48.65% in FY07 to 31.36% in FY08 mainly because of lower current
liabilities. The debt/asset ratio increased to 41.67% during the latest quarter that ended on the 30th
September 2008. This was due to the rise in trade and other payables from Rs 2.7 billion at the end of June
30th, 2008 to Rs 4 billion at the end of the 1st Q09.

Times Interest Earned (TIE) reached a phenomenal level of 1284.23 in FY08 because of extremely low-level
of financial charges as they reached a low of Rs 2.7 million. This was mainly because of the gain on
revaluation of foreign exchange contracts which amounted to around Rs 20.8 million.

In FY09 and FY10 the debt to asset ratio for the company reached 50% and 53% respectively. This is
mainly due to increase in advances from customers and dealers from Rs 985 million in FY08 to Rs 5926
million in FY09 and Rs 8076 million in FY10.

The time interest earned, henceforth, has declined for the company in FY09 and FY10 from 194 in FY08 to
78 in FY09 and 52 in FY10. In FY10, the interest charges are Rs 99 million as compared to 18 million in
FY08.

ASSET MANAGEMENT

The inventory turnover has seen a mixed trend in the past 5 years. In FY09, it increased from FY08 position
from 24 days to 40 days. In FY10, it was again 31 days. This implies that Indus Motor reduced the level of
inventory in FY10. Alongside, the day sales outstanding has also decreased from 16.51 in FY09 to 9.66 in
FY10 due to better credit policies. This resulted in an overall decline in operating cycle in number of days
from 56 days in FY09 to 41 days in FY10.

The sales to Equity improved in FY10 due to 37% increase in net sales for the company. Total Asset
turnover also increased from 1.8 in FY09 to 2.2 in FY10 due to the same reason.

LIQUIDITY

The Liquidity position of the company had been steadily increasing over the years until FY08. During FY04
and FY05, the main reason for a more comfortable liquidity position was decline in current liabilities. During
FY06, the current liabilities increased by 23%, however, the assets increased by 26%. In FY07, the current
assets declined but there was a more than proportionate decrease in current liabilities.

The liquidity of the company improved further during FY08. The current assets of the company decreased by
28.6% however, the short term liabilities decreased more in proportion. IMC's advances from customers and
dealers decreased by 78% while interest payable and trade payable also dropped. The liquid assets of the
company like cash and bank balances and receivables and prepayments decreased but it is not alarming
and the company is in a comfortable liquidity position.

However, in FY09 the liquidity position worsened. Although there was an increase in current assets due to
stock in trade, trade debt and cash and bank balances from Rs 9664 million to Rs 16715 million, there was a
more than proportionate increase in current liabilities from Rs 3779 million to Rs 9884 million in FY09 mainly
due to increase in advances from customers and dealers.

The liquidity position didn't improve in FY10 as the current assets and current liabilities increased
proportionately. The current ratio declined only slightly from 1.69 to 1.67.

FUTURE OUTLOOK

The auto industry is currently faced with a number of problems. There is increased competition from
imported used and reconditioned cars. This is threatening the future domestic sales in the country. The
inflationary pressure and unfavourable economic conditions are decreasing the purchasing power of the
middle-income population and thus hampering demand. Furthermore, the industry faces tremendous
pressure from the government to reduce the prices of locally manufactured cars, against a backdrop of the
depreciating Pak rupee and increasing raw material costs. To top them all, the catastrophic floods that hit
the country in July, the worst natural disaster in Pakistan's history, has added to the much woes of the
nation. With over 20 million people affected and colossal damage to standing crops and infrastructure, the
current state of the economy is simply not capable of withstanding the shock. Not only do the consequences
on the government budgetary estimates for 2010-11 appear severe, all forecasts including GDP growth
rates will need to be scaled down due to risk of a higher fiscal deficit, which in turn will lead to increased
government borrowing.

The domestic auto industry has barely recovered from the fallout of the global economic crises which means
that the above mentioned circumstances is not a positive sign for the company. Also, recently, the
government has signed the Afghan Transit Trade Agreement and unless the safeguards agreed therein are
implemented strictly, this could adversely affect local trade, and especially Spare Parts business.

In the short term, Indus Motors is working on a definitive plan to expand the dealer network and launch the
new CKD Hilux 4 x 4 with common rail engines while in the long term, Indus Motors is looking to increase
capacity and fill it with new products.
COURTESY: Economics and Finance Department, Institute of Business Administration, Karachi, prepared
this analytical report for Business Recorder.

DISCLAIMER: No reliance should be placed on the [above information] by any one for making any financial,
investment and business decision. The [above information] is general in nature and has not been prepared
for any specific decision making process. [The newspaper] has not independently verified all of the [above
information] and has relied on sources that have been deemed reliable in the past. Accordingly, the
newspaper or any its staff or sources of information do not bear any liability or responsibility of any
consequences for decisions or actions based on the [above information].

Copyright Business Recorder, 2010