Honda: Incline mode

Honda Atlas Cars (PSX: HCAR) has demonstrably emerged from its two-year slumber with the highest quarterly profit since Mar-19 and decent margins to boot. Compared to this time last year, when the country was overwhelmed with the outbreak of covid-19 and factories spent the entire month of April, shutters down, with zero production and sales, the outgoing quarter has visibly performed remarkably well, granted given a low-base. That, however, was not the first quarter the company turned a loss.

In fact, the company, much like the industry was having a hard time pre-pandemic too. In Dec-19, a few months before covid-19 realities started to set in, Honda had incurred its first loss, entirely a function of muted demand and a slowing economy. The company is now in all guns blazing mode. Yesterday, it also unveiled the new model of City, which is a top contender in the lower-end of the sedan category, in competition with Toyota’s Yaris and Changan’s Alsvin.

Revenue growth during the quarter ending Jun-21 is outstanding—the top-line more than tripling year on year. This is in line with the volumetric sales growth, slightly lower than the revenue growth 3.3x vs 3.2x respectively. The company’s revenue per unit sold increased by 3 percent (this is an estimated number since we only know how many locally assembled units Honda sold during the quarter). Sales mix is slightly different too. During 1QMY21, the company’s BR-V was 10 percent of total sales while this was 15 percent during the outgoing quarter. Looks like, Honda had a better sales mix in terms of price than last year.

The margin improvement from a dramatic 1 percent last year is now up to 7 percent which is not unfamiliar territory for Honda which has maintained a similar range of margins (in single-digits) since MY18 when margins used to be higher. Rupee value improving together with a more favourable product mix has contributed to this increase. Mostly, in the past, when rupee depreciated, automobile companies raised prices in tandem which hit pause since rupee began to stabilize. Though, July comes with glad tidings as cut in taxes has led to price reductions, rest assured, there is no stopping Honda or any other player from increasing prices again if rupee becomes more expensive. The dependence on imported CKD kits and high value parts and the low level of localization means that companies will arguably remain susceptible to changes in the exchange rate. In recent history, due to covid-related supply shocks and container shortages, freight cost together with input costs, also became a bane.

The regaining demand now comes on the back of a recovering economy with pretty low borrowing costs for consumers who can now avail bank financing to purchase these cars which are not light on wallet when bought with cash. Though, by no measure, is Honda selling cars for the middle-class but the cheaper financing does help with the affordability factor.