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Honda Atlas Cars (HCAR): Earnings revised downward, ‘Hold’ maintained

 

• We revise down Honda Atlas Cars (HCAR) earnings forecast post 4QMY19 financial results and incorporating our revised estimates for PKR against US$. We decrease our EPS estimate of Rs22.8 for MY20E to Rs16.0.
• Above Expectation 4QMY19 result: To recall, HCAR posted above expectation result for 4QMY19, though its EPS clocked in at Rs8.19, down 15% YoY. The decline in earnings was a result of contraction in GP margin by 2ppts YoY to 8% in 4QMY19.
• Result was above expectation mainly due to lower operating cost, down 73% QoQ which resulted in higher EPS from our expectations.
• Margins to remain under pressure: Input cost has been on the rise due to significant devaluation of PKR against US$ & higher inflationary environment, which the company has not yet been able to fully pass on to the end consumers.
• Post IMF staff level talks, PKR has recorded devaluation of around 8% & it is expected to remain volatile due to IMF’s condition to have a market driven exchange rate.
• This will keep margins of auto sector companies mainly HCAR in check due as it is more exposed to PKR sensitivity against US$ (lower localization) as compare to its peer companies .
• Removal of  FED to provide much needed relief: It is more likely that 10% Federal Exercise duty (FED) on all cars above 1700 cc would be removed as sales under this head has drastically declined; HCAR has suffered the most due to the charge of FED in the last mini budget as its 40% sales volume comes from above 1800cc segment.
• According to latest PAMA numbers for the month of April-19 , sales of city and civic variants have cumulatively fell by 43% YoY which is one of the worst YoY decline since April-12. 
• We maintain ‘hold’ call on HCAR, and flag following key risks; 1) higher than expected PKR devaluation against the greenback, 2) higher than anticipated inflation, 3) adverse regulatory changes, 4) prolong slowdown in the economy.