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It’s not like Honda bit more than it could chew, but even so, business-as-usual tends to bite back when the economy toughens its stance. A loss of Rs41 million in the third quarter of ongoing financial year hardly comes as a surprise considering the beating passenger car segment has received over the last year. Though the company saw a total profit in the nine-month period, it did see a decline of 74 percent from last year. Times have changed.

Market expectations, however, were slightly better though all signs pointed south. The company saw volumes shrink by 66 percent and the slightly lower revenue decline came due to the price hikes the company administered. Demand has been lethargic not only because of the continuous price hikes, but consumers delaying car purchasing decisions for a variety of reasons including shrinking purchasing power and high cost of leasing. Higher finance cost due to monetary policy tightening has also affected the company’s short-term borrowing costs which ballooned in the last quarter — now 3.3 percent of revenues. Shrinking advances have been sending the company to the bank, when bank costs are substantially higher than same period last year.

Quarter Oct- Dec Honda Atlas Cars (HCAR)
 (Rs mn) 2019 2018 chg
 Sales         9,864.6       21,292.8 -54%
 Cost of Sales         9,218.3       19,663.8 -53%
 Gross Profit            646.3         1,629.0 -60%
 Distribution cost            241.4            291.6 -17%
 Administrative cost            172.6            171.5 1%
 Finance cost            322.8                 1.9 171x
 Other operating expenses             (27.5)            528.3 -105%
 Other operating income               10.2            232.1 -96%
 Profit (Loss) before taxation             (52.9)            867.8 -106%
 Tax (reversal)             (11.6)            266.2 -104%
 Profit (Loss) after taxation             (41.3)            601.6 -107%
 Earnings per share (Rs) -0.29 4.21 -107%
 Sales (Civic, City and BR-V)            3,692         10,824 -66%
 GP Margin 7% 8% -14%
 NP Margin 0% 3% -115%
 Finance costs as % of revenues 3.27% 0.01%
 Indirect expenses as % of revenues 4% 5% -16%
 Source: PSX, PAMA

Margins have also suffered, though evidently not by a lot, even though the company imports a good share of its inputs from abroad. Rupee devaluation could have hit harder, but the company shielded itself by prudently raising prices — though, demand did suffer as a result. There is a certain extent to which new car buyers can absorb the incremental price tag. Inventory pile up has also pushed the company to keep plants closed for several days.

There was a tax reversal during the quarter which provided a small buffer. Honda cars are considered luxury products and demand is not going to recover any time soon, given that tax burden is higher, price tags are heavier, and cost of borrowing is also up.