Earnings Report /

Honda Atlas: 3QMY22 review – Earnings miss on significantly weak gross margins

  • HCAR announced a 3QMY22 NPAT of PKR446mn (EPS: PKR3.12), much lower-than-our expected EPS of PKR7.58

  • Gross margins declined to c.3% in 3Q, amid rise in input costs and inability to fully pass on costs, in our view

  • We have a Neutral rating on HCAR with March 2023 TP of PKR235/sh

Intermarket Securities
25 January 2022

HCAR has reported a NPAT of PKR446mn (EPS: PKR3.12) for 3QMY22, down a sharp c.40% yoy and c.50% qoq. This takes 9MMY22 EPS to PKR16.20, up from an EPS of PKR6.29 last year. This is a significantly weak result from HCAR (lower than market consensus), where the deviation from our expected EPS of PKR7.58 is due to lower-than-expected gross margins.

3QMY22 result highlights:

  • Revenues of c.PKR30bn, which are up c.65% yoy due to a similar increase in volumes to c.10,375 units (up c.10% qoq); they are broadly in line with our estimate. The rise in volumes is largely due to the rolling-out of new City (pre-booked orders), and pent-up demand following incentives introduced by the government in the FY22 Budget (incentives recently reversed temporarily).

  • Gross margins at c.2.7% has come in significantly lower than our expectation of c.6%, which is likely due to (i) elevated raw material prices during the quarter (steel, aluminum, rubber among others), coupled with c.8% yoy PKR depreciation, (ii) rising sea freight, (iii) inability to fully increase prices on account of greater government monitoring, and (iv) plant shutdown during the quarter largely because of part shortages, in our view. Also, change in sales mix toward new City from Civic is likely to have contributed to the decline in margins, in our view.

  • Financial charges clocked in at PKR16mn (negligible debt). Other income rose by a handsome c.2.0x yoy to PKR530mn, due to a rise in customer advances (increase in cash balances), in our view. Other expenses clocked in at PKR246mn.

  • Distribution expenses doubled yoy on account of greater volumetric sales and promotions with regards to new City launch, in our view. Admin expenses increased by c.20% yoy.

We expect the sales of HCAR to remain relatively flat in the coming quarters, where the new model effect is likely to be countered by the worsening parts issue, in our view. According to channel checks, HCAR is presently focusing on rolling out orders of new City due to large pre-bookings (delivery lead times of all City variants now at least 4mths). The additional c.3% price hikes in January (phased increase announced in November), is likely to lift margins in the coming quarters, in our view. However, measures in the recent Mini-Budget, such as increase in FED, and resultant increase in prices on all Honda cars (excluding 1,200cc City); along with monetary tightening, are likely to dampen future sales, in our view. We have a Neutral stance on HCAR with a March 2023 TP of PKR235/sh.