Honda (PSX: HCAR) and HinoPak (PSX: HINO) technically belong to different sectors within the automotive industry, one is high-engine cars and the other is commercial trucks and buses, while both also differ in their respective scales of production. However, demand dynamics for both are similar. Interestingly, Honda with stronger sales saw a drop in margins in its half year ending September 2017 while HinoPak that had reasonable growth saw margins improve during the same period. Let’s dig in.

Honda Atlas Cars has flipped its fortunes completely now snagging more than 20 percent of the market shares in the three carmaker market. This used to be somewhere 16-17 percent last year. Stronger sales have been brought on by new model for Civic as well as the introduction of a crossover SUV, going by Honda BR-V. Though the BR-V only has about 9 percent share in total volumetric sales, growth in the 1.3L car sales (especially City sales) helped. In the period April-Sep, total sales grew by a phenomenal 44 percent, per data retrieved from PAMA; with revenue growth of 69 percent.

We couldn’t get in touch with Honda for comment, but we can pinpoint why Honda’s margins dropped from 16 percent in Apr-Sep 2016 to 13 percent for the period this year. Steel imports play a dominant role in costs. Steel prices rose by 23 percent between April and September of 2017. Between September of 2016 and 2017, steel prices went up by 79 percent. This likely hurt margins.

HinoPak on the other paints a very steady picture. With volumetric sales growth of 4 percent; the company registered a 6 percent increase in revenue; while margins increased from 11 percent to 13 percent. The Japanese yen against Dollar- that plays a role in costs of production—remained pretty stable in the Apr-Sep period. In the past, yen appreciation had affected margins adversely for the auto sector that imports from Japan. The company also has a diversified portfolio making chassis, Hilux frames for Indus Motors and bodies for its vehicles which helps it to improve productivity.

Indirect costs including administration, distribution and other expenses as a share of revenues remained unchanged for both the companies. For HinoPak, it is 4 percent and for Honda it is 3 percent. Other income for Honda grew by 170 percent due to better funds management and higher liquidity brought forward by bookings and advances.

The government recently announced that it would be levying a super tax during 2018 as in the past which will affect profitability for both. Whereas Honda is doing well dipping its toes in other variants, falling margins is troubling. The market responded and price for the scrip dropped by 8 percent in the past two days.