HCAR: Saved by the skin of its teeth

With a dramatic drop in revenues of 88 percent, Honda Atlas Cars (PSX: HCAR) for the first time since Mar-12 records negative gross margins during the first quarter for MY24. But fortunes shifted quite as abruptly when the company posted a recovery in its before-tax earnings, profits landing at Rs268million, down 76 percent from this period last year. What changed? Hint: it’s not car assembly. This profitability isimpressive giventhe drop in company’s volumetric sales of 94 percent, the company selling only about 600 units during the quarter, down from some 9500 units sold during 1QMY23 last year.

The culprit for shrunk volumes is obvious. Government’s long running LC restrictions have left most assemblers out in a lurch, unable to import enough CKDs to assemble vehicles and meet demand. As a luxury vehicle assembler, it is uncertain how much of a drop in volumes could be associated to reduced demand owing to exorbitant prices. Certainly, ballooning interest rates and SBP’s restrictions on auto financing would have registered its impact as about 30-35 percent of Honda’s sales are on bank financing.

The company has been raising prices which has made up quite a fair bit for the rising costs which has only be exacerbated by the weakening rupee. But perhaps the price increases have not been enough for Honda as costs per unit sold (117%) grew much higher than revenue per unit sold (96%). As a result, margins stood in the red zone.

The company’s overheads (admin and sales expenses) dropped during the quarter but as a share of revenue, which was depressed as it is, overheads were 12 percent of the top-line; significantly up from last year’s 4 percent. The company has higher finance costs during the quarter but they remained negligible as a proportion of revenue.

That brings us to how Honda delivered a profit margin of 4 percent at a time when it’s gross profits stood at a negative Rs148 million. It was entirely made possible by “other income” as the company’s investments in non-primary business activities are delivering fruits owing to the sky-high interest rates. The company prudently made those investments (government securities) and helped shore up its bottom-line.

Alas, this does not change the fact that both demand and supply sides are squeezing the assembler and will continue to do so over the next few months. But perhaps, once supply eases, it would become more transparent how much loss to demand the company is incurring owing to inflation and every other economic woe a country could face in the book.