Honda Car had a stellar first quarter but profits are still on the lower side

It seems like Honda Car is being impacted by the same downturn that has been plaguing the other two major car assemblers in the country. The latest figures show that the company was only able to sell 13,214 units from July 2023 to June 2024. This was the worst year for the company since it broke through the 13,000 units threshold back in 2012. Since then, the company saw sustained increase in sales reaching a peak of 51,494 in 2018. Since then, the company had some good years while others were bad. Even during the early years of the pandemic, the company was able to sell more than 16,000 units. The recent figures show how bad the situation has become for the company as it has seen its sales decrease by around 66% from where they were in 2022. 

The decline in its sales can be attributed to the fact that consumers are moving away from the generic cars that were being provided by these companies and are preferring to buy hybrid electric vehicles which are being offered in the market. In addition to that, as income is stagnant and prices of cars have shot upwards, people are spending less and less on big ticket items. That coupled with record high interest rates have meant that demand has been low for auto financing as well.

The consequence of these decisions is becoming more apparent in terms of the financial performance of the company. The latest annual accounts show that the company has seen its revenues fall by nearly half from where they were last year. Sales of Rs 95 billion were made last year which have contracted to Rs 55 billion this year. Similarly, gross profits have fallen from Rs 7 billion to Rs 4.5 billion for the current year. A bright spot is the fact that the company saw its gross profit margin improve from 7.5% to 8% this year.

The biggest gain that the company saw was that last year they recorded exchange losses of Rs 5 billion due to the currency fluctuations that had taken place. With a stable rupee, the company saw exchange losses of only Rs 0.4 billion this year. The company has also made some shrewd investments with some of its assets which gave a gain or Rs 2.3 billion last year and clocked in the same for this year as well. If exchange loss decreased, the company paid heavily in terms of its finance cost as the finance cost quadrupled from Rs 0.3 billion last year to Rs 1.2 billion this year. This meant that profit before tax was Rs 2 billion last year and actually increased to Rs 2.7 billion this year owing to the exchange losses decreasing. After taxation was taken into account, the company saw its net profit jump from Rs 0.3 billion to Rs 2.3 billion. Due to the increase in net profits, the company saw its net margin go from 0.3% to 4.2% for the year.

Looking at the latest quarter numbers, it seems Honda Car has been able to claw back some of the lost ground compared to last year. In the first quarter of the latest financial year, the company was able to sell 3,285 units which was only 601 units last year. The higher number of sales was reflected in the revenues earned by the company which were Rs 16 billion this year compared to only Rs 3.8 billion last year for the same period. The company saw a gross profit of Rs 1 billion for the latest quarter where they had actually made a gross loss of Rs 0.1 billion for the same quarter. The gross margin came to around 6.3% which was -3.9% last year. In terms of expenses, the company saw a decreased earning from its investments and its finance costs increased by 6 times due to its size of short term borrowings. This meant that even though the company made a healthy gross profit, net profit only came to around Rs 0.2 billion which was Rs 0.14 billion last year for the quarter.

In terms of the performance of the company, it has become evident that its sales trajectory is on a downward slope and seeing the situation in the market, the problem affecting the other two major assemblers namely Pak Suzuki and Indus Motors is also impacting Honda Car. Pak Suzuki sells nearly half the cars in the Big 3 which means that they will be able to weather the storm to some extent going into the future. With consumers demanding better and efficient cars, Indus Motors has also introduced the Toyota Corolla Cross which is a Sports Utility Vehicle (SUV) and a Hybrid Electric Car (HEV) which is being demanded by the market. Honda Car seems most vulnerable at this point as it is mostly relying on selling its Civic and City model cars while response to its SUV has been mild to say the least.

In the face of this situation, the company carried out its corporate briefing session and discussed how it was looking towards the future. The company has announced that they are looking to launch hybrid electric vehicles in the near future in order to capitalize on the opportunity that exists. The company plans to introduce Completely Built Units (CBUs) initially and once it can gauge the demand, it has plans to set up its own plant. The company is looking to invest capital expenditure of around Rs 5 billion in the coming year or so to develop an assembly line. 

The company also expects some recovery in the market for its current product portfolio which can see higher demand in the next two to three years. In regards to the latest quarter showing lower gross margins, a representative at the company stated that due to the recent tax policy introduced by the government, the goal was to cut the margins of its cars in order to reduce the tax expense. The government recently imposed a tax whereby cars selling for more than Rs 4 million would be levied an additional tax. In order to provide a relief to its customers, the company cut margins on its City variant of cars which meant that its gross margins fell for the quarter even though sales increased.