Hino: Hanging by a thread

This is not a good time for commercial vehicle assemblers as demand has plummeted over the last year or so as the country’s macro fundamentals headed south. Hino’s (PSX: HINO) latest financials paint a sobering tale for the company. Truck and bus sales in the Apr-June period for Hino fell by more than 50 percent against a 49 percent drop in total industry sales in the segment. With a similar drop in its top line. Resultantly, the company is now incurring a hefty loss.

Cost of imports is higher due to rupee weakening. Margins have shrunk to 0.5 percent from 7 percent this period last year. The company has managed to squeeze its administrative, distribution and other expenses down to 5 percent of revenue against 6 percent last year. However, it doesn’t make a huge difference as other income dropped and finance cost ballooned. In fact, finance cost is a whopping 12 percent of the revenues in the quarter, against 1 percent last year. This is a big cause of concern for Hino. The finance cost includes a substantial amount of exchange loss and mark up on short term borrowings. The current negative cash balance would push the company to increase bank borrowing which at current Kibor rates is expensive. Monetary policy tightening is only tightening the noose.

The company’s official report mentions the additional custom duty on Completely Knocked Down (CKD) units used for commercial vehicles introduced under budget 2020, which will add an extra burden on costs also given “soaring dollar parity against rupee”. The decline in economic activity indicates a somber demand outlook for commercial vehicles used in transportation by logistic companies, transporters, freighters etc. If CPEC and SEZ related growth picks up pace, perhaps commercial vehicle demand will pick up. Though it is really an industry wide slowdown. Hino’s market share in trucks has actually grown from 49 percent to 51 percent. Its strong presence in the market will bode well when/if overall demand picks up. But right now, its dire straits and Hino is in the thick of it.