HCARs rocky ride

Its not an easy journey for a car manufacturer these days, especially those from Japan. The recent results of the first quarter of Honda Cars are a testimony to that.
The companys topline went down by 18 percent in April-June 2011 versus the same period last year. Supply disruptions due to the devastating tsunami in Japan led to a volume-based decline in sales, so much so that the company did not have any units to sell, according to a company official.
Consequently, an already-shriveled gross margin was pulled down by 0.3 percentage points to 1.2 percent in 1Q2011 relative to the same period last year.
Yet, other operating income surfaced as a saving grace for the company. Company sources revealed that HCARs cash position improved in 1Q2011 because of an improvement in advances received from customers and payments received for back orders.
Therefore, despite declining gross margins, improved cash availability leading with cash invested in bank deposits helped beef up the other income category, which resulted in the company witnessing positive operating margins as opposed to negative ones in the same period last year.
The effect of a better cash position was also reflected in lower finance costs for the company. This being so because improved cash availability reduced borrowing requirements for the company.
Due to lower sales, the net margin tagged in at a negative 1.1 percent, which was better than the -1.8 percent seen in the first quarter of the previous year.
Going forward, HCARs sales are expected to improve. With a one percent cut in GST and exemption of 2.5 percent FED for car sales, customers are expected to have flocked in to purchase the vehicles in July.
Further, the lagging effect of supply disruptions led by the tsunami is likely to recede over the coming months. One would expect the companys sales to pick up again in the near future.

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Honda Atlas Cars

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                                April-June

Rs (mn)                     2011      2010       Chg

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Sales                      4,612     5,637      -18%

Cost of sales              4,555     5,551      -18%

Gross profit                  57        86      -34%

Gross margin                1.2%      1.5%

Profit from operations        16       -20

Operating margin            0.3%     -0.4%

Finance cost                  32        40      -20%

Profit after taxation        -51      -101

Net margin                 -1.1%     -1.8%

EPS (Rs)                   -0.36     -0.71

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Source: KSE notice