Honda: Patchy road ahead

Are the dark clouds finally separating for the automobile industry? Even though automobile assemblers, Honda Atlas Cars (PSX: HCAR) in particularly, has not suddenly started selling more cars, the fact is, by sheer comparison to last year, the company may have outdone itself and it reflects in Honda’s stellar income statement. Remember that Honda’s financial year does not follow the fiscal calendar and ends in Mar. In Jun-24 (or the first quarter of MY25), the company earned profits of Rs203 million, which is impressively up 40 percent from last year’s dismal June performance. This is despite price reductions.

This is best evidenced by its estimated revenue per unit sold (revenues divided by volumetric sales reported by PAMA) that slid 23 percent during the quarter. The resulting revenue growth of 4.23x came upon due to improved volumes- up 5.4x. But volumetrically speaking, last year’s quarterly volumes—mostly due to substantially reduced Civic/City sales—were lowest for as long as one could remember, but that quarter was also an outlier as volumes improved thereafter. To put this into perspective, we estimated the average quarterly volumes for last year with the exception of MY24’s first quarter ending in June. The average quarterly sales for the rest of the three quarters came out to be 3,309 units. This is still higher than volumes during the first quarter of the MY25 at 3,285 units. Evidently, then the beginning of MY25 may not be as striking as it would appear when comparing it to last year’s overall performance.

Another notable comparison should be with the last recorded quarter before Jun-24. Volumes were 35 percent higher in 4QMY24 compared to 1QMY25; revenues were 36 percent higher and post-tax earnings were actually 85 percent more. While Honda is still making positive earnings, the weak outlook on demand does not bode well for upcoming quarters. If the cost of car financing reduces substantially from current levels, perhaps demand would see a turnaround as a fair proportion of the company’s sales historically have been bank financed.

However, if that does not happen, Honda may have to raise prices to compensate for volumetric declines and surging costs of production. In a quarterly comparison again, Honda’s cost per unit sold is up 1 percent from 4QMY24 which could be a matter of concern down the line as revenue per unit sold declined 2 percent quarter to quarter. It has never been the case that the assembler did not raise prices when its costs rose; even at the expense of volumes. The average revenue earned by Honda per unit sold currently stands at Rs4.8 million which peaked last year at Rs6.2 million. In other words, every fresh unit sold by the company adds Rs4.8 million to the top-line. Costs must remain curtailed for prices to stay at this level—everything else is secondary. Customers must brace for a price hike in that case. Meanwhile, demand suppressors—aside prices—continue to pull the chain.