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Honda Atlas Cars (HCAR): 3QMY19 EPS Rs4.2, down 58%YoY (-42%QoQ); (Below expectations)

• Honda Atlas Cars (HCAR) reported its 3QMY19 earnings which were below expectations, with EPS clocking in at Rs4.2 compared to Rs9.92 in 3QMY18 (down 58% YoY), dragged down by both lower sales as well as lower GP margins.
• Despite multiple price hikes since Dec 2017, net sales of the company fell by 2% YoY due to 11% YoY fall in volumes during the outgoing quarter. Decline in volumes was led by 61% YoY lower BR-V sales in 3QMY19, while city and civic variants showed 6% YoY growth in the same period.
• Moreover, gross profits fell 29% YoY due to 1% YoY increase in cost of sales despite 11% YoY lower unit sales. Resultantly, gross margin reduced by 280bps YoY to 7.7% in 3QMY19.
• The primary reason for falling GP margins is the 26% PKR depreciation between Dec 2017 and Dec 2018 which has led to increase in cost of both local and imported parts.
• Earnings were also dragged down by 67% YoY increase in other operating costs originating from exchange loss, we believe. Moreover, 50% decline in other income also reduced the bottom-line. The decline in other income is a result of lower cash and short term investments due to reduced advances from customers available to the company, we believe.
• For 9MMY19, profitability fell by 48% YoY due to 450bps decline in gross margins, 38% YoY higher other operating cost and 26% YoY lower other 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.