Honda’s profit and its loss

With the year the automobile industry has had, Honda Atlas Cars (PSX: HCAR) turning a profit during the year is certainly good for shareholders, if a little surprising on first thought. The company offered a final cash dividend of 10 percent after a net profit of Rs681 million, down 82 percent from last year.

To say demand in the passenger vehicle segment has been patchy would be understating it. Though the downtrend in automobile industry has been coming on since last year, the passenger vehicle segment persevered. But there was a limit to it. Demand slowly chipped away as the dual effect of inflation and reduced incomes started to materialized. Consumers decided to steer clear of non-essential or big purchase items, as interest rates also remained high.

Overall inflation and reduced buying power was only exacerbated by automobile companies continuing to raise prices on every round of rupee depreciation. At some point, consumers cannot absorb the price hike. Honda buyers are typically high-income who are able to absorb the price hike but it is clear that buying patterns changed. In fact, Honda’s balance sheet is a prime example of how close the price hikes have been to any cost increments. Both revenues and cost of goods sold declined 42 percent during the year- in tandem.

But while sales fell 54 percent, revenues did not fall by that much. Revenue per unit sold in fact for the year (as calculated using PSX notice and PAMA volume numbers) rose 25 percent during the year. The company was able to shield its gross margins by prudently raising prices, perhaps eventually at the cost of new business.

Finance costs rose due to higher interest rates but the expense is a small dent to the topline. As a share of revenue, the company saw administrative and other expenses rise during the year. Other income also declined which eventually led to a shrunk profit. Recall the company incurred a loss in the third quarter of its financial year. With covid getting far worse before it can get better—and given that April saw zero sales—do not expect too much changes on the demand front. Very few people are thinking about buying a car, fewer still will actually make such a decision at such uncertain times. While finance costs are now coming down, it is unlikely to drive up auto financing. This paints a sobering scenario for Honda’s upcoming year.