Honda Car earnings drop while peers gain traction

Unlike the thirteen percent year-on-year growth in sales volumes across the auto industry, Honda Atlas Car Limited saw sales grow by mere one percent between Jul-Sep - eroding its market share by 11 percent during the period. The firms below par sales volume coupled with the rather uncontrollable cost of production eroded its bottom-line to the extent that the company reported net loss of Rs380 million for its second quarter ending September.
Following the increase in prices, in an effort to sustain their margins, by automakers nationwide, HCAR also raised the tag by 12 percent year-on-year. But the price hike failed to serve the purpose, as gross margins were marred by the depreciating value of rupee against the likes of yen and US dollar. The high end car maker still imports about 52 percent of its parts, unlike its peers who import an average 40 percent, giving them better cushion against weakening parity compared with HCAR. In addition to negative gross margins, the bottom-line was squeezed further by financial costs that rose manyfold thanks partly to interest paid on short-term borrowing to finance higher working capital requirements needed to raise production level - and partly due to exchange losses. HCARs dismal performance comes in stark contrast with its peers, as latest industry sales numbers reveal a brighter picture. Despite the massive price increase - consumers have not lost the appetite for new cars as they purchased 28 percent more cars in October, than what they did in September - as high end consumers led the buying spree. With volumes rising by 45 percent month-on-month in October, Indus Motors outpaced its peers where sales of Pakistan Suzuki Motors rose 20 percent while that of HCAR increased only 2 percent over September.
Although, the gradual increase in overall auto sales indicates the sustainability of demand recovery, another round of price hike, poor law and order situation and regulatory measures do pose downside risks to the industry fundamentals. As for Honda Atlas, it must keep its pricing effective to beat its main rival Indus, if it has to ensure sustainable profits going forward.

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HCAR P&L

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Rs (mn)                 2Q-Sep09   2Q-Sep08     ()%

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Sales                      4,102      3,621        13%

COGS                       4,236      3,452        23%

Gross profit                -134        168      -180%

Gross Margin                 -3%         5%      -170%

Other Income                   7         34       -79%

Finance cost                 118         27       334%

(L)/PBT                     -336        137      -346%

Taxation                      44         49        -9%

(L)/PAT                     -380         88      -534%

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(L)/EPS(Rs)                -2.66       0.61

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