Honda: solid effort

After some hitches, Honda Atlas Cars (PSX: HCAR) is back to stability after fighting covid as well as the economic slump that was happening pre-covid. In 2Q, the company is demonstrating a solid growth in the top-line pushed forth by recovering volumes and comparatively higher margin sales mix. Based on data available, gross profit per unit sold (estimated) is up 4 percent, year on year.

While Honda BR-V constituted 13 percent of the volumes in this quarter last year (the rest occupied by City and Civic models), in the outgoing quarter of its marketing year, Honda sold slightly more—15 percent of the total sales—in BR-V. Per unit margin shows improvement, but overall, margins have not inched much from last year, and have actually fallen from last quarter. The culprit seems to be higher costs of inputs, high freight rates and currency depreciation effects. These cost effects are now (as predicted in this space) are being passed onto the consumers in the form of price increases. Honda is raising prices in two phases for all its models, the first one being implemented now while the second price increase will become effective in Jan-22.

The company keeps its overheads and borrowing costs in check—the former at 3 percent of revenue slightly higher than 2 percent last year. Finance costs are almost negligible. One component that does contribute to the bottom-line is “other income”. In 2Q, other income stood at 36 percent of before-tax profits which helped earnings shore up by 35 percent (higher than revenue growth).

Compared to last quarter, the company’s income statements look dull now. In 1Q, financials were standing against the covid-quarter last year and the resultant year-on-year growth therefore seemed phenomenal due to the low-base effect. Next quarter, however, might not be as dull.

With monetary policy tightening which will make cost of car financing expensive, coupled with SBP’s restrictions on car loans, the odds are already stacking against vehicle demand. The company’s phased price increase might also pull back car buyers (though not by that much). Before the price hike that comes in effect in Jan-22, more cars are going to be booked. The global shortage of key components such as semi-conductor chips are also not boding well for most domestic automakers which is leading to production and in turn, car delivery delays. If demand does come down, it might not be entirely bad news.

Given the economy is stuck in the vicious cycle of boosting demand and curtailing demand, there is nothing great to write home about. Global supply chain challenges as well as chip shortage will take their sweet time to resolve as well. But there is nothing existential about the current dynamics. Honda is a big, established auto player and it is likely to survive any bumps that come its way.