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Indus Motor Company Limited

Annual Report 1998

CONTENTS

Toyota's Guiding Principles

COMPANY INFORMATION

BOARD OF DIRECTORS

Chairman

Mr. Ali S. Habib

Vice Chairman

Mr. Yutaka Arae

Chief Executive Officer

Mr. Farhad Zulficar

Directors

Mr. Mohamedali R. Habib

Mr. Hideaki Otaka

Mr. Azhar Wali Mohammad

Mr. Masaru Kato

Company Secretary

Mr. Shahid Mahmood Khan

Bankers

· American Express

· ANZ Grindlays Bank plc

· Askari Commercial Bank

· Bank of America

· Bank of Tokyo-Mitsubishi, Ltd.

· Credit Agricole Indosuez

· Deutsche Bank

· Emirates Bank International Ltd.

· Faysal Bank Ltd.

· Habib Bank AG Zurich

· Hong Kong & Shanghai Banking Corporation

· Metropolitan Bank

· Muslim Commercial Bank Ltd.

· National Bank of Pakistan

· Standard Chartered Bank

· Societe Generale .

Auditors

M/s. Ford, Rhodes, Robson, Morrow

Chartered Accountants

1st Floor, Finlay House,

I.I. Chundrigar Road, Karachi.

Legal Advisors

· M/s A. K. Brohi & Co.

· M/s Mansoor Ahmed Khan & Co.

· M/s Mahmud & Co.

Registered Office

14, Bangalore Town Housing Society,

Main Shahrah-e-Faisal, Karachi.

Registrar

M/s. Noble Computer Services (Pvt) Ltd.

1st Floor, AI-Manzoor Building,

Dr. Ziauddin Ahmed Road, Karachi.

Regional Offices

Lahore

8/1, Abid Majeed Road, Lahore Cantt.

Islamabad

2A, Ataturk Avenue West, G-6/4, Islamabad.

Factory Site

Plot No. NWZ/1/P-1,

Port Qasim Industrial Estate,

Bin Qasim, Karachi.

FIVE YEARS AT A GLANCE

1998

1997

1996

1995

1994

(Rupees in '000)

Vehicles sales (units)

9,295

8,100

8,125

6,802

9,440

Turnover

4,973,991

4,538,220

4,136,100

3,869,607

4,722,194

Profit before taxation

271,702

226,286

221,024

85,513

149,702

Taxation

124,538

76,082

33,789

33,792

28,157

Profit after taxation

147,164

150,204

187,235

51,721

121,545

Number of employees

611

598

546

509

553

Earnings per share (in Rupees)

1.87

1.91

2.38

0.66

1.55

The Directors of Indus Motor Company Limited take pleasure in presenting this Report, together with the

Accounts of the Company for the year ended June 30, 1998 and recommend the following appropriations:

1998

1997

(Rupees in '000)

OPERATING RESULTS

Profit before taxation

271,702

226,286

Taxation

- Current

99,538

51,082

- Deferred

25,000

----------

124,538

76,082

----------

PROFIT AFTER TAXATION

147,164

150,204

Unappropriated profit brought forward

707

403

----------

147,871

150,607

APPROPRIATIONS

Dividend - proposed @ 15%

117,900

Transfer to revenue reserve

29,000

32,000

----------

UNAPPROPRIATED PROFIT CARRIED FORWARD

971

707

==========

Auditors

The Auditors, Messrs. Ford, Rhodes, Robson, Morrow, retire at the conclusion of the 9th Annual

General Meeting and, being eligible, offer themselves for re-appointment.

Chairman's Review

The Directors of the Company endorse the contents of the Chairman's Review dealing with the

Company activities which is included in the Annual Report and forms an integral part of the Directors'

Report.

Investment

The Directors have approved investment to the extent of Rs. 1.875 million towards the equity

participation in Messrs. Automotive Testing and Training Centre (AT&TC). This is a newly

incorporated private limited company with an authorised share capital of Rs. 30 million. AT&TC has

acquired from PACO 1/2 acre plot of land located at the Pakistan Steel down stream industrial area

for the construction of its main building.

Year 2000 Compliance

The Company has taken appropriate measures to be Y2K compliant by June 1999.

Earnings Per Share (EPS)

The Earnings Per Share is Rs. 1.87.

Pattern of Shareholding

The Pattern of Shareholding of the Company as at June 30, 1998 is given on page 31.

Karachi:

October 19, 1998

FARHAD ZULFICAR

YUTAKA ARAE

Chief Executive Officer and Director

Vice Chairman and Director

CHAIRMAN'S REVIEW

As Saalam O Alaikum

It is with great pleasure that I welcome you to the 9th

Annual General Meeting of the Company and present to

you the report on the performance of the Company for the

year ended 30th June 1998.

The Company's operation for the year resulted in Gross

Profit of Rs. 446.129 million and Net Profit after tax of

Rs. 147.164 million, after providing for substantially higher

taxation of Rs. 124.538 million, as the Company's brought

forward tax losses were fully absorbed during the

preceding year. Sales revenues increased from Rs. 4.5

billion to Rs. 4.9 billion, the gross profit percentages were

lower from 9.63% to 8.97%, and Administrative and Selling

expenses which increased marginally were offset by lower

financial costs due to better inventory management.

The Directors are therefore pleased to recommend a Cash

Dividend of 15% for the year to the Company's share-

holders, apportioning a part of the profit to reserves for

future capital commitments.

Operations for the year 1997-98

Sales of locally produced Corolla and Hilux vehicles during

the year were the highest in the Company's history. This

was due to positive measures taken by the Government in

January 1998, to revive the auto industry: CKD custom

duty was reduced and CVT (Capital Value Tax) on

passenger cars was abolished. Your company

simultaneously reduced its selling prices and this led to

enhanced capacity utilisation and improved profitability in

the second half of the financial year. The reduction in

selling prices and cost increases due to the Rupee

devaluation were partially offset by the weakness of the

Japanese Yen in the international market against the US

Dollar.

The market environment remained competitive as other

manufacturers also reduced prices. However, your

company's market share in its class of vehicles improved

and was also consolidated due to product diversification

and aggressive sales promotion.

The locally produced Toyota Corolla introduced in May

1993 is now in it's fifth year. Its excellent quality, low

maintenance cost and high resale value has won it the

support and loyalty of its customers. Market studies

indicate that Corolla customers are brand loyal and tend to

replace their vehicles with new Corolla's. Product

diversification and a wide range of colours has allowed

customers to exercise greater options and has sustained

this trend.

In October 1997, the Corolla Diesel 2.0D Limited was

introduced and in February 1998 the 1.6 GLi Automatic

was launched. Three variants of Hilux were also launched

in June namely the Hilux Family, Hilux Van and Hilux

Ambulance. The total Company's products range now

comprises of 8 variants of Corolla and 5 variants of Hilux.

As a result of the "safety first" commitment made to our

customers; for the first time in Pakistan "SRS (secondary

restrain system) air bags" have been introduced in the GLi

automatic and GLi manual models. Side-impact bars which

protect vehicles from side collisions have however, been

routinely fitted in all Corolla variants since inception.

Marketing Operations

A new addition to the 3S dealership network, Toyota

Sialkot Motors, was inaugurated in November 1997. The

network now comprises of seventeen dealerships all

offering Sales, Service and Spares under one roof.

During the year the network serviced nearly 100,000

vehicles. Greater focus in this area will further improve

after sales care. In September 1997, the 7th Dealer

Conference was held in Kuala Lumpur. This was attended

by dealer principals, sales, service and parts staff. Here

future sales plans and product strategies were reviewed

and Toyota experts presented guidelines for the expansion

and improvement of after sales care.

Training was intensified and various courses were

conducted throughout the year. Technicians at the dealers

service departments underwent extensive training by IMC

Service Department to improve their skills. The Customer

Retention Departments at the dealerships were also the

focus of improvement and consolidation.

Human Resources

The Human Resource Department expanded its training

activities and introduced a number of new training courses

focusing on Team-Work, Staff Motivation, Planning and

Leadership. In total, fifteen courses were conducted during

the year, and all were well attended by IMC employees.

Training courses were also conducted for vendors and

dealers on the premises. During the year the Toyota-Indus

Human Resource Training Centre, was set up at the

Registered Office in Karachi. Already the focus of training

activity, this will become fully operational during 1998-99.

Product & Quality Assurance

Challenges to implement product diversification were

many. More Corolla and Hilux variants, a wide range of

colours produced by the Technical Division, and high

quality standards have proved to be of invaluable service

to the Marketing Division in its Customer Retention efforts

and sales expansion programme.

The development of local parts proceeded as per

schedule, and the Iocalisation targets set by the

Engineering Development Board were met. In fact, in the

case of the Corolla XE, the local parts content was ahead

of schedule.

Team work and the Toyota philosophy of Kaizen has

become an integral part of your Company's culture. This

together with team spirit has led to self-policing and a

search for excellence that has helped reduce costs and

increase productivity. The Annual Kaizen Convention of

the Company was held as per schedule and the winning

team visited Japan to make their presentation at the

Toyota International Kaizen Convention.

In December 1997, the IMC Vendor and Supplier

Convention was held. This was attended by IMC vendors

and also by representatives of Toyota Motor Corporation

and Toyota Tsusho Corporation. The Convention was

addressed by Dr. Hafiz Pasha and Dr. Akram Shaikh, the

Chairman and Vice Chairman respectively, of the

Engineering Development Board. Inspecting the locally

developed and manufactured pads, they acknowledged

the positive strides Indus Motor Company has taken

towards the transfer of technology to Pakistan, and

complimented the vendors on the stringent and precise

quality of the manufactured components. Those vendors

whose contribution was outstanding were congratulated

for their adherence to Toyota quality production systems

and for the timely development of parts.

Government Policy

With a view to encouraging and supporting the industry, in

November 1997, the Prime Minster appointed a Special

Cabinet Committee to review the auto industry and

suggest measures for its revival. The recommendations of

this Committee were formulated in consultation with the

industry and proved to be industry-friendly and

substantially enhanced capacity utilisation and also

resulted in all-round benefits: lower selling prices, greater

volumes in vendor manufactured local parts, enhanced

economic and industrial activity in the country, and an

increase in government revenue. For the formulation and

implementation of this policy we are thankful to the Prime

Minister and to the members of the Special Committee. We

request the Government for consistency on policy even in

the future as this will help to consolidate and sustain the

industry's growth.

The Engineering Development Board and the Ministry of

Industries and Production have continued to actively

contribute to the industry. Their support has led to the

steady growth of the industry and stepped up

indigenisation, and a simultaneous increase in production

of local parts.

Future Outlook

The auto industry in Pakistan has the potential to expand

considerably as the vehicle: person ratio is much lower

here than in other countries. However, current economic

uncertainty, as well as the composite exchange rate

leading to further devaluation, and a 30% cash L/C margin,

have led to an adverse environment.

Negotiations and investment plans to manufacture

Daihatsu Cuore and distribute all Daihatsu vehicles in

Pakistan are now in the final stages and are expected to

be completed before the end of 1998. The combined

distributorship and manufacture of Toyota and Daihatsu

vehicles will have multi-faceted benefits for your Company.

This step will increase capacity utilisation of the plant, give

your Company a wide range of vehicles to market, will add

to the strength of the Company, and also to that of its

dealers and vendors, and will also cement the engineering

base of the country.

The Company will continue to strive for the improvement

of skills and expertise of its manpower and that of the

related vendor industry. We are also committed to the

deletion targets which promote indigenisation in the

industry. We are dedicated to maintaining the quality of our

products and improving our market share and our

management and workers have worked with complete

commitment to this goal. Our dealers and vendors have

given us invaluable support by providing efficient after-

sales servibe and by manufacturing high quality

components.

We thank the Ministry of Commerce and Industries and the

Engineering Development Board for their sustained

support. We are grateful to our shareholders, staff, dealers

and vendors for their dedication and commitment to our

common goal. We are particularly appreciative of our

customers and thank them for their loyalty to Toyota

vehicles.

We pray to Allah for guidance and success.

Ali S. Habib

Chairman

AUDITORS' REPORT TO THE MEMBERS

We have audited the annexed balance sheet of INDUS MOTOR COMPANY LIMITED as at June 30, 1998

and the related profit and loss account and the statement of changes in financial position (cash flow

statement), together with the notes forming part thereof, for the year then ended and we state that we have

obtained all the information and explanations which to the best of our knowledge and belief were necessary

for the purposes of our audit and, after due verification thereof, we report that:

(a) in our opinion, proper books of accounts have been kept by the company as required by the

Companies Ordinance, 1984;

(b) in our opinion:

(i) the balance sheet and the profit and loss account together with the notes thereon have

been drawn up in conformity with the Companies Ordinance, 1984 and are in agreement

with the books of accounts and are further in accordance with accounting policies

constantly applied except for the change as stated in note 2.2 with which we concur;

(ii) the expenditure incurred during the year was for the purpose of the company's business; and

(iii) the business conducted, investments made and the expenditure incurred during the year

were in accordance with the objects of the company;

balance sheet, profit and loss account and the statement of changes in financial position (cash flow

statement), together with the notes forming part thereof, give the information required by the

Companies Ordinance, 1984, in the manner so required and respectively give a true and fair view of

the state of the company's affairs as at June 30, 1998 and of the profit and the changes in financial

position (cash flow statement) for the year then ended; and

(d) in our opinion Zakat deductible at source under the Zakat and Ushr Ordinance, 1980 was deducted

by the company and deposited in the Central Zakat Fund established under section 7 of that

Ordinance.

Ford, Rhodes, Robson, Morrow

Chartered Accountants

Karachi

Dated: October 19, 1998

BALANCE SHEET AS AT JUNE 30, 1998

Note

1998

1997

(Rupees in '000)

CAPITAL AND RESERVES

Share Capital

Authorised

100,000,000 (1997:100,000,000) Ordinary

1,000,000

shares of Rs. 10/- each

==========

Issued, subscribed and paid-up

78,600,000 Ordinary shares of Rs. 10/-

each, fully paid in cash

786,000

Reserves

615,971

586,707

----------

1,401,971

1,372,707

LONG TERM LOANS

55,152

123,150

DEFERRED TAXATION

50,000

25,000

CURRENT LIABILITIES

Current maturities of long term loans

61,531

61,025

Short term running finances

5,630

Creditors, accrued and other liabilities

1,138,326

698,811

Proposed dividend

117,900

----------

1,323,387

877,736

----------

CONTINGENCIES AND COMMITMENTS

2,830,510

2,398,593

==========

TANGIBLE FIXED ASSETS

Operating fixed assets at cost

less accumulated depreciation

974,410

1,045,326

Capital work-in-progress

826

6,874

----------

975,236

1,052,200

LONG TERM LOANS

534

274

LONG TERM DEPOSITS

6,762

2,643

CURRENT ASSETS

Stores and spares

72,113

76,880

Stock