It should be brutal for a company that claims to be so highly localized to watch its margins squeeze at the hands of a volatile exchange rate. That has been Atlas Honda’s fate since its financial year kicked off in April. In fact, in the first half of the year, the company has witnessed its earnings shrink by 13 percent. Though demand may see some shifts going forward, so far, that has been the least of any of the automakers problems, whether it is passenger cars or motorcycles. It is input prices that are the bane.
The company’s volumetric sales grew by 12 percent, while revenues grew by slightly less (11%). Since January when rupee devaluation first started to take off, the automotive industry has been increasing prices in different phases. By October, Atlas Honda had raised prices four times—a combined increase ranging from Rs2000 to Rs13000.
Till August, this price hike range was Rs1600-9000. It is clear that the company is not selling as much of its relatively upscale models compared to its flagship CD-70 that remains its dominant sell. The revenue per unit of sales in fact is only up by 0.3 percent during the period which has not kept up with the increase in costs per unit (2%). As a result, the increase in costs is met with margins falling to single-digits from 11 percent during the first half of the previous financial year.
While Atlas Honda is a market leader in the two-wheeler sector—it has had more than 60 percent market share—it does face competition from other players, specially the Chinese motorcycle makers operating in the country. Honda may comparatively have better quality motorcycles which is why it continues to occupy a higher market share but availability of substitutes has dissuaded the company from hiking the prices that much higher.
Localization may be 90 percent for its main variant, other models are not as highly localized, and which require higher share of imported content. The issue is also that the costs for auto parts makers and vendors have been rising owing to increasing imported and local steel prices as well as the higher cost of import due to devaluation. Since Sep-17, cold rolled coil (CRC) prices for instance have risen by 12 percent globally. Couple that with the devaluation, higher costs for vendors and auto makers makes sense.
In other areas, the company inspires confidence. It keeps its purse strings tight in terms of indirect expenses (remained constant 4% of revenues) with negligible finance costs consistent of bank charges. Future earnings will lean heavily on exchange risk, material costs and demand.
Though the price hike seems incremental, those motorcycle buyers who can only afford a vehicle on lease may incur even higher costs due to increasing interest rates. Should that be discouraging for them, demand will witness a slowdown.
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