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Honda Atlas Cars (HCAR): 2QMY19 EPS Rs7.2, down 36%YoY (-2%QoQ); (Below expectations)

• Honda Atlas Cars (HCAR) reported its 2QMY19 earnings which were below expectations, with EPS clocking in at Rs7.2 compared to Rs11.3/share in 2QMY18 (down 36% YoY) as GP margins continued to decline.
• However, due to multiple price hikes since Dec 2017 and ~7% YoY higher volumes, company’s net sales rose by 13% YoY. Growth in volumes continued to be led by Civic and city models, up by 15% YoY, while sales of BR-V declined 38% YoY.
• Despite increase in net sales, gross profits fell 39% YoY due to 20% YoY increase in cost of sales. Resultantly, gross margin reduced by 5.5ppts YoY to 6.4% in 2QMY19.
• 18% PKR depreciation between Dec 2017 and Sep 2018 is the primary cause of deterioration in gross margins as the company faces higher raw material cost for both imported and local components (even local components use certain proportion of imported raw material which is impacted by PKR depreciation).
• Earnings were also dragged down by 35% YoY increase in admin costs and 26% YoY decrease in other income.  In our view, increase in admin costs could be due to revision in salary and wages. On the other hand, decline in other income is attributable to lower cash and short term investments due to reduced advances from customers available to the company, we believe.
• Simultaneously, lower effective tax rate of 24.4% compared to 37.6% in same period last year, supported the bottom-line. We await management guidance to ascertain the reason for drop in taxation.
• For 1HMY19, profitability fell by 44% YoY due to 5.4ppts decline in gross margins, 29% higher admin expenses, 20% higher other operating costs and 15% lower other operating income.
• 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.