AHL: Covid curses

The outgoing quarter has been the worst performing three months Atlas Honda (PSX: AHL) has experienced in recent history. Volumes seem to have been cut down in the middle during the quarter compared to the past five years — and it shows in company’s financial performance as profits have swiftly turned into losses.

Volumetric sales were down 64 percent that brought down revenues by 60 percent — prices have worked favourably here as revenue per unit sold was up 11 percent for the quarter compared to the corresponding period last year. The simple driving factor was Covid-19 — though unlike peers in the car segment, the company’s recorded sales during April - the peak lockdown period in the country - were over 2,000. No cars were sold during that month. Recovery started to come in May and by June, a solid 90,000 Honda motorcycles were sold which is comparable to the pre-Covid levels. If the decline was fast, the recovery has been quick as well.

However, the damage was already done. Curiously, the company’s cost of sales per unit rose 19 percent — higher than its revenue per unit sold which resulted in shrinking margins — dangerously down to only 1 percent. Inflationary pressures and depreciation of the rupee (and costlier imports) may have resulted in higher costs, though given the company’s high localization level, this may be an indication of the sales mix leaning away from the popular lower engine units to higher engine motorcycles that have a lower degree of localization.

The company has now raised prices since July-1 to correct the disbalance — with higher engines getting a heftier addition on their price tag. This may improve margins in the coming quarters. The price hikes are not exclusive to Honda. In fact, Yamaha and United Motors have also raised prices which would make it harder for consumers to switch from one brand to another based on price alone.

Though the company’s borrowing cost as a share of revenue is miniscule, high interest rates resulted in a huge bump in the expenditure. However, interest rates are now down and AHL’s short-term borrowing costs will normalize as well. The more concerning are its distribution and administrative expenditures that stood at 5 percent of revenues, against 3 percent last year. Higher costs and expenses on the balance sheet caused pre-tax earnings to turn red.

Improvement is expected over the coming quarters as the economy stabilizes and travel resumes. Those consumers that were holding off decisions during the lockdown period are likely to purchase their motorcycles now rather than later. However, the government’s recent decision to introduce electric motorcycles to the market — there are tax and duty incentives on the import of completely built electric bikes, on parts and on charging infrastructure — might delay decisions for the affluent segment. Though how much would that affect market share of existing players, if at all, would be premature to say.