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Honda Atlas Cars (Pakistan) Ltd
	(Annual Report June 30, 1996)
CONTENTS
Company Information			2
Notice of Meeting			3
Chairman's Review			4
Chronicle of Events			9
Directors' Report			10
Auditors' Report to the Members			11
Balance Sheet			12
Profit and Loss Account			14
Cash Flow Statement			15
Notes to the Accounts			16
Pattern of Shareholding			28
Form of Proxy
COMPANY INFORMATION
Board of Directors
Mr. Yusuf H. Shirazi		(Chairman)
Mr. Kanji Kashiwagi		(Chief Executive)
Mr. Aamir H. Shirazi
Mr. Hiromi Mizutani
Mr. Jawaid Iqbal Ahmed
Mr. Satoshi Okamoto
Mr. Tetsu Wada
Company Secretary
Hafiz Muhammad Hanif
Executive Committee
Mr. Kanji Kashiwagi		(President)
Hafiz Muhammad Hanif		(Vice President)
Mr. Hiromi Mizutani		(Vice President)
Mr. Aamir H. Shirazi		(Observer)
Auditors
A.F. Ferguson & Co.,
Chartered Accountants
Legal Advisors
Cornelius, Lane & Mufti
Sattar & Sattar
Bankers
ABN AMRO Bank
ANZ Grindlays Bank
Citibank N. A.
Deutsche Bank
Muslim Commercial Bank Ltd.
The Bank of Tokyo-Mitsubishi Limited
Registered Office
1-McLeod Road, Lahore.
Phone: (042) 7225015-17
Fax : (042) 7233518
Factory
43-Km. Multan Road,
Manga Mandi,
Lahore.
Phone: (042) 5750011-17
Fax : (042) 5750020
NOTICE OF FOURTH ANNUAL GENERAL MEETING
Notice is hereby given that 4th Annual General Meeting of the members of Honda Atlas Cars (Pakistan)
Limited will be held on December 30, 1996 at 2:00 P.M. at 1-McLeod Road, Lahore to transact the
following business:
1. To confirm the minutes of the last Annual General Meeting.
2. To receive, approve and adopt the audited accounts for the year ended June 30, 1996 together with
Directors' and Auditors' reports thereon.
3. To approve dividend @ 10% (i.e. Re i for every ordinary share of Rs 10/-) for the financial year
ended June 30, 1996 as recommended by the Directors.
4. To appoint Auditors and fix their remuneration. M/s A. F. Ferguson & Co., Chartered Accountants,
the present auditors of the company, being eligible, offer themselves for re-appointment.
5. To transact any other business with permission of the Chair.
			By Order of the Board
Date: December 8, 1996			HAFIZ MUHAMMAD HANIF
Place: Lahore			Vice President & Company Secretary
NOTES:
1. The share transfer books of the company will remain closed from December 23, 1996 to
December 29, 1996 (both days inclusive).
2. A member entitled to attend and vote at the Annual General Meeting is entitled to appoint another
member as a proxy and vote on his/her behalf. Proxies in order to be effective, must be received
at the Registered Office of the company not less than 48 hours before the time of the meeting.
3. The shareholders are requested to notify the company, immediately, of the change in their address,
if any.
CHAIRMAN'S REVIEW
I feel great pleasure to welcome you at the 4th
Annual General meeting of the Company and
present the Annual Report for the year ended June
30, 1996.
ECONOMY AT A GLANCE
The country's economy passed through a difficult
phase inspire of some positive economic indicators.
In the year, 1995-96, the GDP grew to 5.7% against
4.4% in the preceding year. Industrial Sector grew
6.1% as against 3.6% last year. Agriculture Sector
showed growth of 6.7% compared to 5.9%. A good
cotton crop during the last year helped some
revival in the textile industry. However, the
Government resorted to further borrowing which
resulted in an inflationary pressure on domestic
prices as well as in the exchange rate and the
balance of payment. Exports increased by 7% and
import grew to 16.2%. Overseas workers
remittances declined by 21.7%. Current account
deficit widened to 6.6% of GDP compared with
3.6% during 1994-95.
The foreign direct investment tripled to $1.1 billion.
There was a sizeable increase in the foreign
currency deposits which helped mitigate the
impact of wider currency account deficit. Foreign
exchange reserves stood at $2.1 billion at the end
of 1995-96.
Inflation during the fiscal year increased to 10.8%
(official) due to reliance on further indirect taxes,
heavy increase of domestic loans and devaluation
of rupee in as much as imposition of regulatory
duty contributing to higher production costs. This
cumulatively resulted in cost push inflation.
	OUR PERFORMANCE
NEW MODELS
Your plant was inaugurated in July '94 when we
launched Honda Civic 1.5 litre in EL and EX
models in various colours, with water cooled
4-Stroke SOHC 16-Valve, and 4 Cylinder engines.
These were highly appreciated by the customers.
These models continued till the end of 1995. Since
July '94 your company has consistently launched
several versions of the Honda Civic model, all with
the latest options available i.e. 1.5 litre LXi and EXi
and 1.6 litre VTi with both Manual & Automatic
Transmission options, engines of Programmed Fuel
Injection (PGM-FI) technology, and VTEC-Variable
Valve Timing and Electronic Control System which
is Honda's exclusive technology and produces
maximum combustion efficiency.
Your Company is the first to introduce automatic
transmission in the locally assembled EXi and VTi
models. This makes driving easier and safer as
forward gears are shifted automatically covering
all ranges. This enables the driver to concentrate
more on car handling while paying attention to
the traffic.
We have extended the car assembling line
whereby assembling capacity has been increased
by 50%. We have also set up an engine shop which
will help in further increasing the deletion
percentage and reduce the cost per engine. These
facilities have also helped in creating additional
new jobs.
QUALITY CONTROL
Quality Control made a substantial contribution
in presenting Honda Civics in excellent quality.
Continuous Statistical Quality Control methods
and 7-tools of Quality Control were employed.
Local vendors in parts development were also
assisted in establishing stern Quality Control
systems. Currently, your company is getting 238
locally made parts through 36 Pakistani part
makers thus achieving a deletion level of 31%. The
number of our part makers is increasing steadily.
In our models, the deletion contents are compatible
to any other comparable brands being produced
in the country.
In order to meet with quality standards 28
associates from different shops were sent abroad
for getting technical training at the plants of Honda
Motor Company, Japan, P.T. Prospect Motor Inc.,
Indonesia and Honda Cars Manufacturing Co.,
Thailand during the year 1995-96.
DEALERS TRAINING
Extensive training has been imparted to the
dealers' technicians at your Company premises in
order to strengthen technicians skill. On Job
training at dealerships for diagnostics, repair and
maintenance of PGM-FI and automatic
transmission was also given which was assisted
by an expert from Honda Motor Company, Japan.
In order to meet the current and future needs,
your service department has introduced a one-year
apprenticeship system at each dealership. During
the year, 32 apprentices with high school education
were registered. In addition, at each dealership, a
customer relation department was established to
serve the customers promptly, comprehensively
and in a more satisfactory manner.
Presently, we have a network of eight 3S dealers.
Being aware of the high expectations of our
customers from us, we will be expanding our 3S
dealership network further in geographically
convenient cities. These additional dealerships will
be a continuous process depending on market
conditions in order to serve our customers better.
When your Company entered the Pakistan market
in 1993-94, there were two manufacturers with
long established network of sales, service and
parts supply. Now another manufacturer has
entered the field, thus increasing competition in
the already limited market. We will continue to
manufacture and present environment friendly
products with safety features for our class of
customers to whom we have sold 10,000 Honda
Civics by August, 1996. We are enjoying 36%
market share in its category of cars.
We attribute our success to our products, market
strategy and overall management. These combined
with our work ethic and sincerity of purpose
helping us to reach excellence in all areas. We are
striving to achieve continuous product and market
improvement with cost reduction and, above all,
the customer satisfaction.
OPERATING RESULTS
Your Company's sales revenue increased to
Rs 2.783 billion against Rs 2.538 billion of
1994-95, showing a growth of 9.65%. The pre-tax
profit increased to Rs 215.88 m. against Rs 120.86
m. in the preceding year. The gross profit for the
year improved to 12.71% against 9.51% of the
preceding year. These improvements were made
possible through better management, stable Pak.
rupee-yen parity and a consistent production and
marketing policy.
Administrative and Selling expenses of Rs 92.93
million were in close proximity to Rs 92.81 million
in 1994-95 and financial expenses of Rs 35.12 million
were also marginally higher than Rs 34.01 million
of 1994-95. In 1995-96, 4548 units were produced as
against 4840 in 1994-95; units sold were 4551 as
against 4648 units in 1994-95. The difference among
others, is due to the change of model and the time
taken for deletion in order to fulfill the conditions
of industry specific indignization.
During 1995-96, however, ROE was 25.64% and
an after tax EPS Rs 5.03 compared with ROE of
18.41% and EPS of Rs 2.69 in the preceding
year. Your Company's equity has increased to
Rs 744.58 million from an original capital of
Rs 400 million within a span of 2 years. The break
up value of the share with a face value of Rs 10 is
Rs 18.61. The share has fair amount of liquidity in
the market and has traded well, reaching a peak
of Rs 32 during the year under review.
Your Company set a record of profit during the
first six months of its setting up, in the Honda world
and automobile industry in Pakistan. Within 2T
years of its operation, we have declared the maiden
dividend of 10%. This is the seventh Atlas Honda
Group Company quoted on the Stock Exchanges.
Your Company has contributed a sum of Rs 891.2
million to the Government revenues in the form
of sales tax, income tax, custom duties and other
levies. In two years the Company has contributed
Rs 1,741.81 million to the Government revenues.
The Group paid in all about Rs 2.16 billion to the
exchequer out of a turnover of Rs 8 billion last
year, or 27% of the sales. Whereas, it is our pleasure
to contribute to the Government exchequer, the
business units must remain profit centers in main,
rather than Government revenue collection centers.
This will help the economy grow better.
GOVERNMENT POLICIES & HIGH
TAX INCIDENCE
Presently, the car industry is passing through a
difficult phase due to the impact of the 1996-97
budgetary measures, such as, the increase in
import duty from 32% to 40%, and sales tax from
15% to 18% etc. These have resulted in an increase
of Rs 45,000 - 55,000 per car. In addition, a CVT
levy at 4 - 12.5%, of sale price has also been
imposed. A 3.8% devaluation of Pak Rupee in Sept.
'96 followed by another of 8.5% in October '96
with imposition of 2% service charge on imports
inspection by SGS/Cotecna, announced in Oct. '96,
will further push up the production costs by
Rs 50,000 to 62,000 per car.
Presently, the total price of a typical car - without
CVT - at Rs 809,000/- comprises Rs 257,553 as
Government revenues i.e. custom duty at import
stage of Rs 130,101, sales tax of Rs 123,407 and
presumptive tax on income of Rs 4,045. The CVT
ranges from Rs 32,360 to Rs 101,125 on the
purchase price, in addition to the aforesaid duties.
This makes 31.84% of the price of the car payable
to Government without CVT and 34.46% with CVT
for the tax payers. For the non-tax payers, it is
39.41%. In order to meet with our targets, among
other things, we would rely upon the customer's
understanding.
The increase in prices of the cars is due to our
socio-economic conditions. For the last two years
that we are in the market, the price increase was
only due to increase in Government revenues. We
are, for taxes, but the taxes must always be rational
and compatible with the customer's purchasing
capacity. On our side, we may assure that the benefit
of lower duty on CKD as compared with on CBU
is passed on to the customers and not shared by the
principals, assemblers and the dealers.
Pakistan is a country of 131 million people. Only
lower and stable tax rates, a hi-tech export based
investment policy, and an appropriate marketing
strategy will expand the market thus enhancing
prosperity and creating higher revenues for the
Government exchequer: Nothing else!
DELETION POLICY
Your company has a policy of pursuing
indignization of components and parts in order to
reduce reliance on imports, reduce exposure to
exchange rate fluctuations for ultimate price
stabilization and develop broad based technology.
Currently, your Company is focusing on
developing joint ventures and technical ties
between local part makers and their Japanese
counterparts.
In order to strengthen the engineering industry,
efforts for vendor development and protection
through tariff measure, among others, and duty
free import of raw materials will have to be made.
In developed countries, deletion programs were
duly monitored and aggressively followed in order
to achieve their present envious industrial status.
We strongly feel that we need to push deletion
programs in the country, so as to achieve fuller
deletion in comparative circumstances without
resorting to the developed world's policy of tariff
based incentive only - without monitored
protection which, in turn, will result in a set back
to the deletion program. We believe, indignization
is antidote to costs increases and, as such, follow
it rather firmly.
It has been recognized, finally, that WTO is not
applicable to the automobile industry and, as such,
entitled to protective monitoring. This industry has
developed throughout the world in that manner.
The automobile industry is always conducive to
the economic growth on the whole.
The Government has constituted a high powered
Engineering Development Board in order to review
the existing deletion programs and make them
industry specific from the existing 'firm specific'.
The salient features are standardized nomenclature;
standardized index system; policy duration of 5
years - July 1996 - 2001; no adhoc schemes i.e. yellow
cabs, green tractors etc.; new entrants to start at
industry level achieved already; recommendations
regarding the tariff regime upto 2001; industry level
targets linked to annual industry volumes and
availability of technology; reconditioned cars ban to
continue; no roll-back etc.
I do hope that with the approval of these
recommendations by the Government, the process
of indignization will be accelerated' these
recommendations would provide a solid base for
the development of the engineering industry in
Pakistan.
DISCRIMINATION: PARTY TO PARTY,
MAKE TO MAKE AND MODEL TO MODEL
In 1994, an order No. 12/43/93-CS dated 26th June
'94 was issued by the Cabinet Secretariat which
coincided with the start of Honda commercial
production, that the Government will buy cars only
upto 1300 CC for the year 1994-95, thus debarring
purchase of Honda 1500 CC locally produced cars
in the public sector. This order, which has already
expired is however continuing. This order
particularly excluded Honda cars being produced
locally to be sold to the Government. It continues
to deprive Honda from Honda's share in the
Government demand. Another discrimination that
followed was through a notification issued, early
during this year, that cars upto 2000 CC with diesel
(and not petrol!) can be produced locally within
the same duty rate as currently applicable to the
CCs upto 1600. This clearly shuts out Honda once
again. As if, this was not enough, the CGO No. 15
dated 30th August, 1983 which allowed minor
adjustment of the CC upto 50-CC of the engine
power has been done away with, in the last budget
for 1996-97 through CGO No. 14 of 1996 dated the
13th June, 1996. Such discriminations lead to
specific advantages for competing brands which
we have been highlighting for our Government to
rationalize. We hope these discriminations will be
removed soon.
MARKET EXPANSION
Pakistan economic planners continue to rely
upon devaluation as the only policy measure to
jump start the economy and perhaps also hold
the notion that exports are highly price elastic.
In retrospect, however, devaluation has thus far
failed to help control deficit financing, reduce
balance of payment deficit and minimize inflation.
In fact, Pakistan's economy which depends on
import of wheat, edibles, kitchen consumables, as
also imports of plant, machinery and equipment,
spare parts and industrial raw materials finds itself
further burdened by the monumental external and
internal debts and an ever increasing cost of living.
The successive devaluations coupled with the
withdrawal of all subsidies on utilities has, thus
far, resulted in considerable cost push pressures.
Pakistan's economic solution thus lie in hi-tech
investment, hi-tech production, hi-tech
employment and value added exports like auto
engineering. The solution would also lie in
reducing the revenue expenditure, and in the
expansion of demand and supply rather than
resorting to devaluation which increases the cost
of production, resulting in cost increases which
shrink markets by curtailing customers' buying
power. But, for successive devaluations and lack
of hi-tech investment and production and export,
the car market would have bern much more than
it is at present.
Being a leading Company in the product, market
strategy and overall management, we consider
market expansion as one of our responsibilities. We
are focusing on it through a variety of approaches.
One such approach is price rationalization through
localization of parts, in house and through vendors,
not excluding use of our competitors facilities on
reciprocal basis and international resourcing of parts
supplies. Our focus will also be on market
innovation, dealers training and customer education.
On the other hand, the Government must restrain
from such schemes as import of yellow cabs or old
cars which eats into the vitals of local industry,
volume for costs reduction, developing know-how,