Honda Atlas Car’s (PSX: HCAR) financial results for the nine months ending Dec-18 show strong and persistent demand for Civic/City which together yielded a 14 percent volumetric growth even as demand for its crossover SUV plummeted. This translated to a revenue growth of 8 percent. The company has been passing on the negative effects of the currency to the consumer—raising prices by 14-15 percent or some variants (higher for others) since Dec-17. The combined volumetric growth was only 3 percent during this period but due to higher prices, revenue per unit (calculated) went up by 5 percent. Not too shabby for Honda, and it’s a good thing, consumers keep coming back to it despite higher prices.
Needless to say, this is not a great time for the automotive industry. The rupee weakening (since Dec-17, the currency has depreciated by 27 percent) has forced their hands as they still depend considerably on high value imported parts. Even aside from that, higher costs were inevitable when imported metal commodities (cold rolled coil etc.) that local auto vendors use become expensive. And now the industry must worry about demand.
On the commercial vehicle side, matters are a little dire. Restriction on non-filers to purchase vehicles, market being flooded with old and used trucks, lower demand coming from the logistics industry at large have really put a dampener on Hino Pak’s (PSX: HINO) growth path. Volumetric sales for trucks fell by 25 percent during the nine month period since April-18 (year on year) while buses came back to surprise with a positive growth. Trucks share is much higher, which led to an overall drop in revenues of 16 percent. Still the revenue per unit went up by 5 percent which means what was sold fetched better prices but decline in demand ultimately came to bite back.
For Honda, the high cost scenario led to 11 percent increase in costs of production per unit sold. Margins consequently fell below 8 percent, but it could have been much worse. In Hino’s case, gross margins fell by 48 percent because not only did cost rise, sales also fell. In Honda’s case, the company announced in Oct-18 that it would be raising prices in Jan-19 again. This would take the overall price hike to 18 percent for some of its variants and higher for others (more than Rs500,000). Consumers have likely been racing to the dealership to register before they have to pay another Rs100-200,000 more.
The demand slowdown is inescapable in the passenger car category as cost of borrowing due to higher interest rates is up and higher car prices also come into effect. However, some brokerage houses are arguing that the used car restriction recently implemented (“New policy needed for old cars!” Jan 23, 2019) would bode well for OEMs as demand for imported cars can be substituted by local manufactured cars. Particularly for Honda, this seems unlikely since most imported vehicles come in competition with Suzuki. Would buyers of Mira that costs around Rs1.2 million shift to Honda that costs Rs2.9 million just because there is a restriction on former—it’s far-fetched.
Meanwhile, the possibility of another price hike is always there if currency weakens any further, which will affect demand. Recovery for BR-V sales seems unlikely as well, since it is a luxury vehicle and consumers tend to delay purchasing decisions of luxury items when disposable incomes come under pressure.
Alas, there is nothing Hino can do but hope for a demand turnaround in trucks. If the promised SEZ and CPEC-led growth in the segment materializes, if regulations that require freighters and transporters to replenish their fleets come into play, if logistic companies expand their operations due to greater industrial and retail demand, the company could bounce back from the loss it is incurring now. Nevertheless, comes Mar-19, it will be a sobering finish to the year for Hino.
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