Despite a 47 percent drop in total volumes and seemingly debilitating restrictions on the import of CKD kits imposed by the Central Bank, Honda Atlas Cars (PSX: HCAR) delivered a stunning financial performance in the quarter ending in Dec-22, earning Rs811 million in after-tax income. This is not only higher than last quarter’s losses of Rs385 million, but also an 82 percent increase in profits compared to the same quarterly period last year when the company sold double the number of cars as it did this year.

This performance was made possible through a more favorable sales mix with the introduction of the Honda HRV and a significant increase in overall prices that allowed a much higher per unit revenue achieved. The SUV share for Honda grew to 30 percent in total sales—which is the highest for the company yet. During the quarter, revenue per unit sold grew 47 percent (estimated using volumetric sales recorded during the period) compared to the same quarter last year. It was also 20 percent higher than the previous quarter. Despite rupee depreciation and challenges in imports, it seems the company had enough inventory to deliver on the cars it took bookings for and saw only a 39 percent increase in cost per unit sold. The company’s gross margins grew 195 percent year on year, standing at 8 percent, as a result.

The company was able to maintain its overheads and other expenses as a share of revenue despite the new launch marketing expenditure. Its finance costs rose quite a bit from the previous quarter and the last year caused by an increase in short-term debt, higher interest rates, and demurrage costs for shipments stuck at the port. However, these remained at only 1 percent of revenue which is a fairly small share.

The company typically maintains a very healthy flow in “other income” due to its cash balances and short-term investments. Last year in Dec-21, other income was 83 percent of before-tax earnings i.e., the majority of the income was through investments and advances. This year in Dec-22, other income has dropped to 28 percent of before-tax earnings as cash reserves deplete.

As in previous years, the company will wait for March to give dividends to the shareholders which will really depend on how well it continues to perform in the upcoming quarters. Though the government has lifted the quota restrictions, banks are not opening L/Cs. Though Honda is a luxury car maker and targets high-income groups and corporate clients, the current decline in volumes is hardly a function of demand and is almost entirely supply-driven. But with the exorbitant cost of borrowing which is only rising, sky-high inflation which will get only worse in the coming months, and expected increase in direct and indirect taxes, consumers will get squeezed from every direction. Though Honda buyers are fairly less sensitive to car price increases—at times willing to pay “own” or premium to get their vehicles on time—they might be sensitive to changes in disposable income. These factors will certainly come into play once supply challenges ease. It does appear that Honda’s current victory may be short-lived.