Honda Atlas Cars (Pakistan) Limited

Honda Atlas Cars (Pakistan) Limited (PSX: HCAR) was incorporated in Pakistan as a public limited company in 1992 and commenced its commercial operations in 1994. HCAR is formed as a result of a joint venture between Honda Motor Co., Ltd., Japan and Atlas Group of Companies, Pakistan. The company is engaged in the assembly and progressive manufacturing and sale of Honda vehicles and spare parts. The company has a huge dealership network which includes thirty seven 3S (sales, service and spare parts), twenty 2S (service and spare parts) and five 1S (spare parts) authorized dealers across the country.

Pattern of Shareholding

As of March 31, 2022, the company has a total of 142.8 million shares outstanding which are held by 6,909 shareholders. Honda Motor Company Limited, Japan holds the major chunk of 51 percent shares of HCAR, followed by Shirazi Investments Private Limited with 30.2 percent in the company. General public accounts for 6.71 percent shares of HCAR while financial institutions hold 4.37 percent shares. Mutual funds and Joint stock companies hold 1.90 and 1.41 percent shares of HCAR respectively. Investment companies have a stake of 1.31 percent in the company. The remaining shares are held by other categories of shareholders holding less than 1 percent shares of HCAR.

Historical Performance (2018-22)

Between 2018 and 2022, the topline of HCAR slumped only in 2020. Among the remaining years under review, 2022 touted the strongest topline growth of 60 percent year-on-year. Conversely, the bottomline plunged in 2019 and 2022 and boasted a robust turnaround in the subsequent years. The gross margin of HCAR had been on the downhill journey since 2018. The OP margin and NP margin which had also been ticking down since 2018 slightly recovered in 2021 and then leveled out in 2022. The detailed performance review of each of the year under consideration is as under.

In 2019, HCAR’s topline posted a marginal year-on-year rise of 4 percent. Overall, it was a difficult year for the automobile industry as the fiscal budget 2018-19 imposed restriction on non-filers to buy new cars which massively restrained the overall industry sales volumes. Furthermore a 10 percent FED was levied on the locally assembled cars of 1700 cc or above. Pak Rupee depreciation also resulted in cost-push inflation and the local assemblers had to revise their prices which also kept the potential buyers at bay. HCAR sold 48,648 units in 2019 as against 50,100 units sold in 2018. The 4 percent topline growth is merely on account of price hike during the year. High cost of production suppressed the gross profit by 30 percent year-on-year in 2019 which drove the GP margin down from 11.4 percent in 2018 to 7.7 percent in 2019. Operating expenses rose by 8.61 percent during 2019 which was in line with inflation. The main growth propellers under this account were salaries and wages, warranty cost, repair and maintenance charges as well as freight and handling charges. Other expense grew by 3 percent year-on-year on account of exchange loss while other income slid by 30 percent year-on-year on the back of realization of short-term investments to meet working capital requirements during the year. Operating profit went down by 41 percent year-on-year in 2019 with an OP margin of 5.9 percent as against 10.4 percent in 2018. The company doesn’t have any bank borrowings on its book as of March 2019. The 23 percent year-on-year shrinkage in finance cost in 2019 is on account of lesser bank charges and lesser markup on advances from customers. Net profit plummeted by 41 percent year-on-year in 2019 to clock in at Rs.3851.11 million with an NP margin of 4 percent as against 7.1 percent in 2018. EPS also climbed down to Rs.12.10 in 2019 from Rs.26.90 in 2018.

2020 brought its own share of unique challenges for the economy. The outbreak of COVID-19 resulted in restricted economic activity across the board. While the restriction on non-filers to purchase new cars was reversed, FED ranging from 2.5 percent t 7.5 percent was imposed on different models of cars. Moreover, an additional 5 percent customs duty was levied on the imports of automobile parts which jacked up the cost of production. On the other hand, lockdown imposed resulted in reduced disposable income of consumers which culminated into demand contraction. HCAR could only sell 22,418 units in 2020, registering a 54 percent year-on-year decline in sales volume. Even the launch of Honda Civic RS Turbo and an updated version of BR-V couldn’t save the company’s topline from 42 percent year-on-year decline in 2020. High cost of production on account of higher customs duty and Pak Rupee depreciation coupled with high fixed cost per unit due to underutilized plant capacities pushed the gross profit down by 44 percent year-on-year in 2020 with a GP margin of 7.4 percent. Operating expenses slid by 19 percent year-on-year due to lesser salaries as the number of employees were considerably reduced from 2,284 in 2019 to 1,482 in 2020. Moreover, advertising and promotion budget was also reduced during 2020. Other income considerably dwindled by 51 percent in 2020 on account of lesser profit on bank deposits as there was a drop in new car bookings. Besides, investments realized to meet the working capital requirements also drove the other income down. Other expense plunged by 18 percent on the back of lower provisioning against WWF and WPPF in 2020. Despite contained expenses, operating profit nosedived by 59 percent year-on-year in 2020 with OP margin clocking in at 4.1 percent. Finance cost drastically rose from Rs.11.19 million in 2019 to Rs.727.44 million in 2020 as HCAR obtained short-term loan from Asian Honda Motor Company Limited, Thailand to meet its working capital requirements. This drove the net profit down by 82 percent year-on-year in 2020 to clock in at Rs.681.75 million with an NP margin of 1.2 percent. EPS also dropped to Re.1 in 2020.

In 2021, automobile industry started heading towards the recovery path with staggering rise in sales and profitability. The availability of cheaper financing options in 2021 resulted in an increase in HCAR’s’ sales by 7.28 percent during the year to clock in at 24,050 units. The topline grew by 22 percent year-on-year in 2021. While the year ended with a significant appreciation in Pak Rupee, high fluctuations throughout the year coupled with increased fixed cost due to underutilization of capacity at the start of the year (COVID quarter) resulted in a 25 percent year-on-year rise in the cost of sales. This pushed the gross profit down by 8 percent year-on-year in 2021 with GP margin dropping to 5.6 percent. Operating expenses grew by 11 percent primarily on account of higher salaries and wages as well as higher fee and subscription charges. Other income boasted a tremendous year-on-year rise of 44 percent in 2021 on account of influx of new car bookings coupled with exchange gain due to positive movement in currency. Other expense dropped by 77 percent year-on-year as the company didn’t incur any exchange loss during the year. Operating profit multiplied by 27 percent year-on-year in 2021 with OP margin slightly ticking up to 4.3 percent. Finance cost declined massively by 84 percent year-on-year in 2021 due to monetary easing, repayment of loans and favorable currency movement. The bottomline mounted by 163 percent year-on-year in 2021 to clock in at Rs.1793.21 million with an NP margin significantly improved to 2.7 percent. EPS also mounted to Rs.4.5 in 2021.

In 2022, HCAR posted a handsome 60 percent year-on-year increase in its topline as demand of automobile industry increased on the back of improved incomes through agriculture, export, remittances and urbanization. The company launched new Honda City during 2022 and its overall sales clocked in at 37,613 units which is a year-on-year rise of 56.4 percent over last year’s volumes. This would’ve been even higher had the mark-up rates not increased. During the year, monetary tightening kept a check on consumer financing which otherwise would’ve buttressed the sales volume. High cost of production due to commodity super cycle in the global market coupled with Pak Rupee depreciation drove the cost of sales up by 61 percent year-on-year in 2022, pushing the GP margin down to 5.1 percent. The advertising and promotion expense posted a steep rise in 2022 on account of the launch of a new Honda City. This coupled with higher salaries and wages, high ocean freight rates, fuel and power charges and increased operational activity throughout the year resulted in 43 percent year-on-year hike in operational expenses. Other income posted a stunning 118 percent year-on-year growth in 2022 due to better funds management supported with high discount rate. Conversely, other expense mounted by 315 percent year-on-year in 2022 due to exchange loss, freight loss and higher provisioning for WPPF. The operating profit grew by 49 percent year-on-year in 2022; however, OP margin inched down to 4 percent. Finance cost massively dropped by 54 percent in 2022 owing to the repayment of short-term loans. However, there is a huge discrepancy in the 2022 finance cost figure posted by the company in the annual report (Rs.115.914 million) and the one given in the 2023 PSX release (Rs.53.26 million). While the detailed financial statements of 2023 are not yet published to identify the reason for this discrepancy, one thing is for sure that finance cost tumbled in 2022. This culminated into a 40 percent year-on-year rise in bottomline which stood at Rs.2509.91 million in 2022 with an NP margin of 2.3 percent. EPS also climbed up to Rs.7 in 2022.

Recent Performance (year ended March 2023)

HCAR’s topline which had tremendously grown since 2021 posted a 12 percent year-on-year downtick in 2023. This came on the back of a 32 percent year-on-year drop in sales volume which clocked in at 25,720 in 2023. The topline drop would’ve been even more momentous had the upward price revisions not provided some support. In addition to tamed demand due to low disposable income and lackluster economic activity, import restrictions due to dwindling foreign exchange reserves also took its toll on the production and sales volume of HCAR in 2023. Low imports and operational activity during the year resulted in a 14 percent year-on-year decline in cost of sales which improved the GP margin to 7.5 percent in 2023. Operating expense stayed almost the same in 2023 as in 2022 despite a 22 percent year-on-year rise in administrative expenses. This was because the distribution expense nosedived by 21 percent year-on-year on the back of low sales volume. Other income posted a 16 percent year-on-year rise despite low order book on account of higher discount rate and better funds management. Other expense magnified by a massive 401 percent in 2023 due to substantial foreign exchange loss owing to Pak Rupee depreciation and demurrage charges due to import restrictions. Operating profit slumped by 46 percent year-on-year in 2023 which pushed the OP margin down to 2.4 percent. To add to agony, finance cost posted a drastic rise of 550 percent year-on-year in 2023 due to excessive monetary tightening. This culminated into a 90 percent decline in the bottomline which stood at Rs.260.14 million in 2023 with an NP margin of 0.3 percent. Never since 2013, has HCAR’s NP margin stooped so low. The EPS also tumbled to Rs.1.82 in 2023.

Future Outlook

With the continued political and economic instability, the future doesn’t seem promising for the automobile giant. On one hand, Pak Rupee depreciation, commodity super cycle, import restrictions and the associate demurrage charges as well as high ocean freight rates will mar the operational efficiency of the company. While on the other hand, restrained demand due to high inflation and financing rates as well as dwindling disposable income will prove to be a double whammy to the company. High discount rate will continue to suppress the bottomline and margins and make the coming times highly testing for HCAR.