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HCAR delivers better margins despite low volumes

Honda Atlas Cars (Pakistan) Limited (HCAR) announced its financial results for 2QMY20 wherein the company reported above expected EPS of PKR3.6, down 51% YoY.

 

The company managed to deliver a bump in margins despite lower volumes for the quarter while absence of exchange loss helped depict improvement in earnings sequentially.

 

HCAR saw its top-line clock in at PKR11.6bn, down 35/55% QoQ/YoY, courtesy of 47/67% QoQ/YoY decline in volumes for 2QMY20 with 4.4k units sold. To note, similar volumes were last seen 3QMY16. Some respite was attributable to change in mix to slightly favour high-end Civic and Civic Turbo variants and timely price increments.

 

Gross profits depicted a drop of 26% YoY to stand at PKR1.2bn during the quarter where tamed costs resulted in margins depicting an uptick of 288/406bps QoQ/YoY to 10.4%.

 

Lower other income as well as absence of exchange losses helped delivers 99% increase in EBIT. On the other hand, increased borrowing restricted profitability at PKR510mn for the period.

 

Cumulatively, topline for 1HMY20 was noted at PKR29.5bn, down 41% YoY owing to 52% YoY lower vehicle sales. Gross profit came down 32% YoY to PKR2.6bn.

 

The uptick in financial cost to PKR254mn (up 40x YoY) is likely attributable to short term borrowing by the company in contrast to its debt-free balance sheet previously, a phenomena already witnessed in Pak Suzuki Motor Corporation Limited (PSMC).

 

Profitability for 1HMY20 stood at PKR752mn, down 64% YoY translating to an EPS of PKR5.26.

 

We view the auto sector to depict some respite in volumetric decline going into 4QMY19. HCAR is expected to depict pressure on profitability till volumetric decline subsides.

 

Key risks include; (i) higher than expected devaluation in currency, (ii) increase in commodity prices, and (iii) steeper than expected drop in economic activity.