During the first quarter of the year for Honda Atlas Cars (PSX: HCAR), the company has made a loss of over Rs500 million, which is higher than the quarterly net profit it made last year. One factor, naturally, is the evident reduction in sales, down 72 percent during the quarter—the company recorded zero sales in April. This was a directly result of Covid-19 engulfing the country forcing provinces to adapt mitigating strategies such as city-wide lockdowns and curfews. However, some reduction in demand is organic.
Recall that before the coronavirus, the automobile industry was experiencing a stagnation all on its own. The economy was slowing down, interest rates were high, and inflation was adversely affecting purchasing power. Honda, along with its automobile peers had been raising prices every few months citing rupee depreciation that added uncertainty in the market. As a result, the company found inventories piling up with little demand forthcoming which resulted in factories closing down for days.
All of this was only exacerbated by the pandemic outbreak during this quarter. The company kept the plants closed for 55-60 days. Notice that sales reduction of 72 percent led to a revenue decline of 64 percent, slightly lower. This is likely because the company has been conscientious of its rising costs and has raised prices in tandem. Margins dropped to 1 percent from 8 percent not only due to rising costs but also the higher fixed cost the company incurred per unit from plant closure. Production has been severely hurt.
Finance costs is still less than 2 percent of the top line—not a huge dent though indirect expenses have increased to 7 percent of revenue (1Q last year: 6%) despite a reduction in other expenses due to lower Workers Profit Participation Fund (WPPF) take outs.
With lockdowns being relaxed and life going back to some semblance of normal, production has restarted. However, demand might not come as quickly as expected. Bank financing is substantially cheaper which is one positive development for end-user consumers but the cost of vehicles is that much higher. While it is true that consumers of high-end luxury cars such as Honda’s BR-V or Civic tend to be less sensitive to price changes, the demand for Honda’s cars is not entirely inflexible. Consumers - specially the breed of younger car buyers - will be making thoughtful, informed decisions, especially with new models being introduced in the market which may chip away at the market share for existing cars. However, let’s not underestimate the power of brand loyalty - a reliable indicator for future demand. Anecdotal evidence suggests car buyers are once again paying premiums to get the current cars in the market which is a strong sign of recovery, all other factors notwithstanding.
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