Despite a pronounced reduction in volumetric sales (down 57% to be exact), Honda Atlas Cars (PSX: HCAR) ended the third quarter of its marketing year M24 (ending Dec-23) with earnings of Rs143 million, year on year, after accounting for taxes that stood at about 37 percent of income. Profits are down a substantial 82 percent! But given that only two quarters ago, Honda was out at the deep end incurring a quarterly loss of Rs824 million (quarter ending Mar-23) at a time when volumes were more than double of what they are now; this should count as a win.

But maybe it won’t, as the previous quarter (ending Sep-23), Honda sold more cars, andhad a higher earning profile making after-tax profits of Rs675 million; after a tax incidence of a whopping 55 percent—the company’s pre-tax earnings stood at Rs1.5 billion, highest in 20 previous quarters. Honda has been running promotions for its City models as well as its HR-V and BR-V promising priority and immediate deliveries, extended warranties and financing offers. This may have been boosted sales over the past two quarters compared to the first quarter where sales slump was devastating. The company along with the industry was facing inventory challenges and had to run plants under capacity. The company spent much of the past year in non-production days.

Since then, a lot has evidently improved, though volumetrically, not by a long shot (see graph). Over the past two quarters, the company has also worked on cost cutting which brought down overheads by a large margin. In Sep-23 and Dec-23, overheads are down to 6 percent and 5 percent of revenues. However, finance costs in Dec-23 put a dampener on costs reductions made elsewhere as they climbed to roughly 4 percent of revenue(likely due to higher debt), up from 0.9 percent the previous quarter and 1.4 percent in Dec-22 (3QMY23).

Margins are also down this quarter compared to Sep-23, from 11 percent to 8 percent. Revenue earned per unit sold has been declining since Jun-23, though costs have been declining more. Though the revenue per unit sold was higher in Jun-23, gross margins were negative as costs per unit sold were even higher. Better cost management and procurement plans may have helped. In 3QMY24, gross margins of 8 percent are higher than same period last year as PKR strengthened.

Typically, Honda’s bottom-line is sufficiently buttressed by “other income” in the form of cash balances (that come through customer advances) and short-term investments but in Dec-23, there is a marked depletion of said income, down 11 percent year on year, and slashed by thrice its size compared to the previous quarter. This is a bad omen for what’s to come. Judging by ongoing sales, such an omen may not be completely out of the left field either.