Some management decisions can haunt a company for years. Take the case of Honda Atlas Cars (HCAR) whose management implemented an ambitious capacity enhancement plan back in 2005-06 that increased the companys ability to assemble up to 50,000 units annually. The decision seemed prudent at the time as the company sold just over 20,000 cars in 2005 and almost 31,000 units in the following year.
But since then, fortunes have turned on the countrys third largest automotive assembler as sales have dropped to less than half compared to the peak level of 2006. As a silver lining in this dark cloud, the expansion was carried out at a time when each US dollar cost less than Rs65; compared to the current rate of about Rs85.4 per greenback.
Still, it appears that HCAR will have to wait much longer than earlier envisioned, to churn out 30,000 units a year, given the sharp rise in car prices and discontinuation of liberal car leasing schemes by domestic banks.
So it comes as little surprise that HCAR has posted a loss for the third consecutive year in its result announced on Monday.
This performance is, however, much better than the previous year in terms of net sales that have risen by 39 percent. But the increase in cost of sales has further squeezed the gross margin from 1.51 percent to 0.9 percent in the outgoing financial year.
The company has introduced austerity measures to curb costs, including a reduction in marketing expenses. However, reductions in both administrative costs and distribution costs during the outgoing year are too miniscule to warrant mention.
Perhaps the biggest saving grace for the company has been the jump in other operating income, which shot up a whopping 219 percent over the last year to almost Rs84 million.
Many analysts are anticipating stiff competition for local assemblers in coming months now that the government has once again eased terms on the import of used cars. However, HCAR officials contend that there are few similarly priced substitutes for Civic and City models.
The real cause of uncertainty for HCAR remains the resumption of supplies from earthquake-ravaged Japan. "The next three months are crucial for us and only then will we have a good assessment of prospects for this years sales," a company official told BR research.
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Honda Atlas Cars
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(Rs mn) FY11 FY10 chg
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Net Sales 22,026 15,854 39%
Cost of Sales 21,827 16,094 36%
Gross Profit 199 240 -17%
Gross Margin 0.9% 1.5% -40%
Distribution Expenses 139 125 11%
Administration Expense 172 136 26%
Other Operating Income 84 26 219%
LAT 298 852 -65%
Loss Per Share (Rs) 2.09 5.97 -65%
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Source: KSE notice
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