The weakening rupee has wreaked havoc, especially in the case of those companies that use substantial volumes of imports for manufacturing. Honda Atlas Cars (PSX: HCAR) is clearly one of the prominent ones. Input prices, in fact, whether imported or local have become pricier enough to put a dampener on the significant enough growth witnessed by the sales of the company. In the nine month ending Sep-18, the company saw its revenues grow by 13 percent and in contrast, it’s bottom line fall by 44 percent. That’s brutal enough, but in line with expectations of brokerage houses.
Let’s first look at costs. The company imports CKD kits and other inputs while auto parts vendors import parts and commodities as well as such as steel, plastics, leather etc. Most of Honda’s variants maintain low levels of localization since these cars tend to be higher-end. Localization may be a lot lower for a variant like the cross-over BR-V which was introduced only a year ago and garnered phenomenal interests from car buyers. Between Sep-17 and Sep-18, the rupee has weakened by 18 percent; and to date, by 27 percent. Moreover, cold rolled coil (CRC) prices for instance (an input) have risen by 12 percent globally since Sep-17. Together, these contributed to a rise in average cost per unit of 9 percent for HCAR.
As a way to cushion the blow from the higher and fast growing costs, the company has been raising prices. Honda City and Civic prices were raised by 11 percent between Dec-17 and July-18 for certain models. And the latest devaluation led to a subsequent price increase in Oct-18 and an announced bump in Jan-19—overall, Honda will have raised prices by 18 percent or more since Dec-17. This would limit the blow to the margins going forward. But so far, they have not done a lot to safeguard them—margins dropped to single-digit from 13 percent this period last year.
Indirect expenses have remained constant at 3 percent of revenues with negligible finance costs keeping expenditure tight and in control. The future of Honda will be determined by its demand, competition and overall economic fundamentals. Demand is definitely not staying strong. With higher interest rates, cost of financing will rise. Couple that with the price hike of Rs500,000 or more by Jan-19, and the possibility that car premiums (where consumers buy vehicles from investors rather than directly) will increase as there is currently a restriction on non-filers to buy vehicles. All these factors at a time when the economy is slowing down do not paint an environment conducive to buy new cars. The company also expected competition from upcoming new players. Aside from a potential slide in demand, the year-end earnings will heavily lean on the exchange rate and prices of inputs and materials, especially those that are imported by auto makers and vendors.
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