Honda Profits Declined by 76% Amid Sharp Dip in Sales

Honda Atlas reports negative gross margins during the first quarter of MY24 for the first time since March 2012, owing to an 88% reduction in revenues. However, things turned around almost as quickly when the company reported a turnaround in its before-tax profitability, with profits coming in at Rs 268 million, down 76% from this time last year.

Remember, the company sold only approximately 600 units during the quarter, down from about 9500 units sold during 1QMY23 previous year, which represents a 94% volumetric decline in sales for the company. In spite of this, the profitability is astonishing.

The primary reason for the decreased volumes is the government’s long-standing LC restrictions due to which most assemblers including Honda Atlas are stranded since they are unable to import enough CKDs to put together vehicles and meet demand. Given that around 30-35% of Honda’s sales rely on bank financing, rising interest rates and SBP’s limits on vehicle finance also have had an effect.

In order to offset increased costs, which have been made worse by the sinking rupee, the company has been hiking pricing. Honda’s costs per unit sold (117%) climbed far faster than its revenue per unit sold (96%). Perhaps as a result, the margins were negative since the price increases were insufficient.

The company’s overheads (administrative and sales costs) decreased during the quarter, but as a percentage of top-line revenue, which was already low, overheads increased considerably from last year’s 4 percent to 12 percent. Although the company’s financial costs increased throughout the quarter, they were still insignificant in comparison to revenue.

This brings up the question of how Honda managed to turn a profit margin of 4% while its gross earnings were negative at Rs148 million. Since the company’s investments in non-primary business operations are paying off as a result of the exorbitant interest rates, it was totally made possible by “other income.” The company made those investments (in government securities) responsibly, which supported its financial position.

Unfortunately, this doesn’t change the fact that the assembler is currently under pressure from both the supply and demand sides and will remain under stress for the foreseeable future. However, once supply eases, it can become evident how much demand is being lost due to inflation and every other economic adversity a country could experience.

Source: Business Recorder

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