In terms of marketing theory, Honda motorcycle has a well-established product offering at a mature stage of its product life-cycle. Such brands are expected to enjoy stable but modest growth. But not Atlas Honda; the company registered 25 percent volumetric growth in 3MFY18, the flagship CD-70 being the dominant variant sold.
The volumetric growth could be easily explained away by supply-side gaps, lack of substitutes, and superior quality, but how then would one explain the decline in profitability? Whom to fault, when a company with leading market position and a solid brand profile fails to protect itself against the only risk to its fortunes? It is the exposure to exchange risk.
This should not be the fate of a company that claims 90 percent localization of its product. But a back-of-the-envelope analysis reveals that at a maximum assumed import-to-production cycle of inventory of 30 days, the company has import LC orders of average Rs1.7 billion at a time, which translates into annual import exposure of up to Rs20 billion. That is close to 35 percent of annual raw material and 28 percent of cost of sales.
And thus, while the volumetric growth translated into similar jump in top-line, cost of sales ballooned by incremental 2pp, leading to 150bps fall in gross margin. And while the company continued to exercise strong control on its overhead costs through lean management that the auto industry is now synonymous with, it was not enough for operating and net margins to remain intact, which recorded decline of 110 bps, and 80 bps respectively.
Similar is the fate of Honda Atlas Cars; however, at least the car company does not claim to be highly localized, rather prides itself on its high imported component. And why should it not market when lower domestic component is synonymous with better quality, to an extent where imported used cars have come to dominate the resale market. Honda Cars capitalizes on consumer perception of “import equals quality”, and its sedan & jeep variants command premium price for the same.
While HCAR also managed to sell more units compared to the same period last year, higher cost of sales eroded the increase in revenue here too, leading to a 52bps decline in gross margin. Lower BR-V jeep sales contributed too, but the company wasn’t banking on the variant becoming the lead selling unit anyway: the buoyancy recorded last year was mostly thanks to new model launch and hence fewer units sold this year.
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