Honda: Begin Again

Honda Atlas Cars (PSX: HCAR) wrapped up its marketing year with a 40 percent growth in earnings which should be certainly confidence boosting for investors. The earnings expected in the market, however, were even higher. This in the time of an ongoing chip shortage, commodity prices spiralling in the international markets, freight rates sky high and rupee depreciating. What benefited Honda was its continued demand amid all its challenges.

Evidently, Honda buyers are not too sensitive to price changes and would rather buy their desired vehicles at the time they want irrespective of how much more expensive these cars are than they were only 2 years ago. Prices have certainly moved unabated. There also might be a belief that prices will raise more. But in a market that is notorious for “own money” or hefty premiums, persistent demand despite price hikes should not be surprising.

The revenue per unit sold is a good measure of how fast prices have increased. In MY22, Honda sold 57 percent more cars compared to last year ending in March-21. Volumes were supported by the launch of new Civic variant (the company does not report volumes for city and civic separately).

Surging costs is a story told and retold everyday. Not only have imports become expensive due to depreciating rupee, inflationary pressures on inputs and growing fuel prices have certainly led to costs ballooning. The revenue and cost per unit sold have moved up historically and in tandem (see graph). The result is margins dropping to 5 percent despite a substantial demand growth.

The company’s profits have been substantially buttressed by other income that constitutes of customer advances. In MY22, other income padded the bottom line by 47 percent versus 33 percent last year. This also indicates ongoing demand growth over the next few months.

Moving forward however, the company may lose demand on buyers that intend on buying vehicles on bank financing as interest rates continue to hike up.