Honda's Profits Plunge by 76% in MY24 First Quarter

27 Jul 2023

260 Honda

Honda's Profits Plunge by 76% in MY24 First Quarter

During the first quarter of MY24, Honda Atlas faced a significant setback as it reported negative gross margins for the first time since March 2012. This surprising turn of events came as a result of an alarming 88% reduction in revenues, leaving the company grappling with financial challenges.

Amidst the negative gross margins and revenue decline, Honda Atlas managed to achieve a surprising turnaround in its before-tax profitability. Despite profits coming in at Rs 268 million, which represented a substantial 76% drop from the corresponding period last year, the fact that the company managed to maintain profitability was seen as a glimmer of hope amidst the financial difficulties it faced.

The heart of Honda Atlas's struggles lay in the drastic decline in sales volume during the first quarter. The company sold only about 600 units, which was a sharp contrast to the approximately 9,500 units sold in the same period last year (1QMY23). This staggering 94% drop in sales volume had a severe impact on the company's revenue generation and overall performance.

The primary reason behind the plummet in sales volume was attributed to the long-standing LC (Letter of Credit) restrictions imposed by the government. These restrictions left many automobile assemblers, including Honda Atlas, unable to import sufficient CKDs (Completely Knocked Down units) to meet the market demand for vehicles. Moreover, the company's reliance on bank financing for around 30-35% of its sales further compounded the issue, especially with the rising interest rates and the State Bank of Pakistan's (SBP) limitations on vehicle finance.

To combat the impact of increased costs, which were exacerbated by the depreciation of the rupee, Honda Atlas implemented a pricing strategy. However, this approach faced limitations as the company's costs per unit sold surged by 117%, outpacing the growth in revenue per unit sold, which was only 96%. Consequently, the margins turned negative as the price increases failed to compensate for the rising costs.

In the face of financial challenges, Honda Atlas sought solace in its investments in non-primary business operations, particularly government securities. These investments proved to be fruitful due to the prevailing high-interest rates, ultimately supporting the company's financial position and providing a cushion amidst the negative gross margins.

While the positive turnaround in profitability brought some relief, Honda Atlas is far from being out of the woods. The company continues to face significant pressure from both the supply and demand sides. The constraints in the supply chain and challenges in meeting market demands are expected to persist, making it a challenging road ahead for the company.

Only when the supply situation eases will the true extent of demand impact, caused by inflation and other economic adversities, become evident. The company's ability to adapt to changing market conditions, navigate through government restrictions, and implement effective strategies will be crucial in determining its future success in the competitive automotive industry.

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