Honda Atlas Cars Pakistan’s Profits Nosedive Despite Massive Sales

Honda Atlas Cars Pakistan Ltd. (HCAR) has announced its financial results for the third quarter that ended December 31, 2021.

In a notification to the Pakistan Stock Exchange, the company has reported a profit of Rs. 445.94 million during the third quarter down by 41 percent as compared to the same period of the previous financial year when it reported a profit of Rs. 751.80 million.

According to a report by Topline Securities, the earnings of the company remained lower than expectations primarily due to lower-than-expected gross margins.

During the first nine months, the profits of the company grew by 157 percent to Rs. 2.31 billion compared to Rs. 897.65 million during the same period of the previous financial year.

During this quarter, the company increased by 67.50 percent to Rs. 29.53 billion as compared to b sales of Rs. 17.64 billion recorded in the same period last year, with multiple price hikes. The cost of sales was reported at Rs. 28.73 billion, up by 74.25 percent compared to Rs. 16.49 billion in the same period of the previous financial year. This took the gross profits to Rs. 800 million, down by 30.45 percent compared to Rs. 1.15 billion in the same period of the previous financial year.

According to Topline Securities, the earnings were lower due to lower gross margins which clocked in at 2.7 percent in 3QMY22, down from 6.5 percent in 3QMY21 and 6.9 percent in 2QMY22. This is lower than the last 12-month average gross margins of 6.6 percent due to the lagged impact of rupee devaluation, freight charges and higher inventory costs.

Total car sales of Honda increased by 66.52 percent to 10,376 units in 3QMY22 compared to 6,231 units in the same period last year. This was primarily driven by the launch of the new model of Honda City, macro recovery and low base effect.

The other income of the company increased by 117 percent during the quarter to Rs. 530 million as compared to Rs. 244 million in the same period last year due to improved advances from the customers, higher cash and cash equivalents.

Distribution and marketing costs increased by 102 percent in the period under review to Rs. 181.25 million compared to Rs. 89.90 million in the same period last year. Administrative expenses increased to Rs. 246 million compared to Rs. 206 million in the same period last year.

The financing cost of the company decreased by 52 percent to Rs. 16.14 million in the period under review as compared to Rs. 33.37 million in the same period last year.

Earnings per share of the company in 3QMY22 were reported at Rs. 3.12 compared to Rs. 5.26 in the same period last year.

What Lies Ahead?

HCAR witnessed a significant rise in sales in the third and final quarter of the 2021 calendar year with the launch of the 6th generation City.

However, the decline in profit margins occurred due to the rise in raw material costs, freight charges, depreciation of the Pakistani Rupee against the US Dollar, and other production-related hiccups around the end of the previous year.

Also, with the enforcement of revised Federal Excise Duty (FED) and sales tax rates, the import costs for the Completely Knocked-Down (CKD) kits have also increased, prompting all automakers to announce massive price hikes twice within the past three months.

Although, with further increase in the operational costs expected in 2022 due to the ongoing supply-chain and economy concerns, it is safe to say that more price hikes are on the way, which are likely to impact HCAR’s performance in the next quarter as well.