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Honda Atlas Cars (HCAR): 1QMY19 EPS Rs7.4 -50%YoY (-24%QoQ) (In-line with Expectations)

• Honda Atlas Cars (HCAR) reported its 1QMY19 earnings, with EPS clocking in at Rs7.4 compared to Rs14.6/share in 1QMY18, down 50% YoY, as GP margins dropped significantly.
• Company net sales rose by 13% YoY due to 3 price hikes since Dec 2017 as well as 13% YoY growth in volumes. Volumetric growth was led by Civic and city models, up by 21% YoY, while sales of BR-V declined 19% YoY.
• Cost of sales outpaced net sales growth, rising by 20% YoY in 1QMY19. Resultantly, gross margins contracted by 5.2ppts YoY to 9.0% in 1QMY19.
• We attribute deterioration in gross margins to increase in raw material cost and approximately 15% depreciation of PKR from Dec 2017 to Jun 2018 .
• Earnings were also dragged down by 28% YoY and 22% YoY increase in distribution and administrative expenses respectively, which is a result of increase in fixed overhead costs in line with sales, as per our channel checks. Simultaneously, other operating costs were up 37% YoY which is primarily due to exchange losses as per channel checks.
• On a sequential basis, earnings declined 24% QoQ due to twin effect of volumes decline (-12%) as well as margin contraction (0.6ppts QoQ).
• The profitability was also reduced by an effective tax rate of 44% as super-tax was booked during the quarter.
• We flag 1) further unfavorable movement in exchange rate & commodity prices, 2) regulatory changes, 3) increased competition from existing and new players and 4) disruptions in operations of principal company, as key risks for the company.