HCAR: Just the beginning!

In the first quarter of its marketing year 2023, luxury vehicle assembler, Honda Atlas Cars’ (PSX: HCAR) earnings take a slide by 29 percent. But this may be just the beginning to a tough beating that Honda and other assemblers within the industry are about to experience.

In the three months ending June, Honda managed to sell almost 9500 units distributed between Civic, City and Honda BR-V models (City sales were strong due to the 6th Generation launch) up 24 percent from the same quarter last year, but down 10 percent from the previous quarter. But 9,442 units of sales is not bad considering the growing certainty that demand will screech to a halt in the upcoming months. This is not only because of poor economic environment which does not indicate car purchasing behaviour from consumers clutching their purses at rising inflation levels. Cars are expensive and cost of formal borrowing from banks is not only costlier due to higher interest rates but also has curbs placed on by the SBP, especially for luxury vehicles. These regulations together with SBP-induced supply chain hiccups in the form of limits into CKD imports will squeeze supply.

Honda’s quarterly performance in this light where revenues grew 39 percent during the period (year on year) pushed on by strong pricing. Revenue per unit sold for Honda improved 12 percent. The company has to contend with ballooning costs (exacerbated further by rupee depreciation) which have been passed onto consumers in the form of subsequent price hikes. Costs per unit sold in 1QMY23 grew 13 percent. Massive depreciation has occurred this month which will likely send prices in frenzy in a market that is already cooling down. Even though, luxury vehicle buyers are not that sensitive to price changes, there is a certain level that would make them uncomfortable to absorb. Unless incomes also increase, it is difficult to imagine a scenario where demand will persist. Even if it did, supply restrictions will keep market down.

There isn’t much about Honda to write home about. Margins are not ideal at growing costs. Earnings are heavily buttressed by “other income”, even though overheads and finance costs remained controlled at roughly 4 percent of revenue. Other income for Honda currently stands at 48 percent of before-tax earnings (that means, nearly half the current profits came from advances), and is up 57 percent from last year. Car bookings therefore have been happening even though there should be curtailments as the company announced it was having problems delivering existing orders on time (much like Indus Motors and other assemblers) where delivery of models like Civic could go from 4-5 months to a year. With recent wave of rupee depreciation and SBP’s Letter of Credit (LC) requirement for CKD imports, Honda will potentially suspend booking for some time following the footsteps of other assemblers rowing in the same boat.