HCAR mired in red

Since the onset of the crisis in 2008, Honda Atlas Car Ltd has fallen on hard times. After facing two consecutive loss making years, the company wasn able to lift its bottom away from the red zone during the first quarter ended June 30, 2010 as it reported a net loss of Rs100.8 million for the period.
Though, improvement in economy helped lift its sales volume by 72 percent to 4310 units in the period under review over the same period a year earlier, the company did not seem to get much benefits of scale.
Owing to a low indigenization level - around 35 percent - and weakening rupee, high cost of imports and exchange losses have continued to exert pressure on the assemblers bottom-line. In the last fiscal year alone, the rupee declined by 6 percent and 14 percent against the greenback and yen respectively.
With production capacity at 50,000 units per annum, low sales volume of around 12,000 units in the past two years - against an annual average of 21,000 units sold during 2005-08--- is going hard on the company.
Moreover, the company is also facing high depreciation and finance costs, in keeping with investment made in the past to increase production, in house value addition and improvement of indigenization level.
Amid stabilizing economic indicators and improvement in corporate earnings, the market expects demand for Civic and City - HCARs local production - to grow further in the next three quarters. But since prices of raw material are surging globally, it will be difficult for HCAR to pass on the cost to customers due to strong competition in high-end car segment.
Moreover, various officials and ministries are forcing the government to ease the restriction on car imports to open up doors for more competition. In this regard, lately the Competition Commission of Pakistan has recommended the government to reduce customs tariff on the import of new cars, suggesting to shift the industry from a reactive demand-based model to a proactive supply based model.
If these proposals are accepted for the upcoming trade policy, the influx of imported cars will put further pressure on the local industry to reduce their cost of productions to avoid further cuts in the bottom line. In short, times haven turned favourable for Honda as yet.