By: Imran Ahmed Patel,
Global Securities Pakistan Ltd.
Honda Atlas Cars (HCAR) registered phenomenal growth of 288% YoY in its earnings to PKR 1,220mn (EPS: PKR 8.54) during 1H FY15, as compared to PKR 314mn (EPS: PKR 2.20) earned during same period last year. In spite of a decline in volumetric sales by 8% YoY to 11,769 units, earnings improved because of expansion in gross margins and reduction in other operation expenses. A comparatively stable PKR/USD parity and improvement in the localization levels resulted in a 6pps improvement in gross margins to 13.3% during 1H FY15. On a quarterly basis, the company’s earnings fell by 7% QoQ to PKR 586mn (EPS: PKR 4.11) during 2Q FY15, against PKR 634mn (EPS: PKR 4.44) in 1Q FY15.
|3mo ending||%||3mo ending||%||6mo ending||%|
|Cost of sales||9,852||6,937||(30)||9,743||6,937||(29)||19,822||16,788||(15)|
|Profit after Tax||634||586||(7)||(13)||586||n.m.||314||1220||288|
|Source: Company Accounts|
Recovery in volumes expected by FY17
Despite a lackluster industry growth in FY14, HCAR, the manufacturer of Honda City and Civic in Pakistan, achieved highest ever sales since its inception. During the period, the company’s volumetric sales improved by 23% YoY to 23,271 units, representing a market share of 17%. This improvement in the company’s sales was due to improved buyers’ interest toward its offerings because of model maturity of its competing brand ‘Corolla’. Moreover, timely launch of City Aspire 1.5L with customer oriented offerings garnered additional sales for City model.
Start of FY15 remained challenging for the company to maintain sales growth momentum due to changed market dynamics. As a result, the company’s volumetric sales and market share declined to 7,888 units and 14% during 5mo FY15. The primarily reason for this decline in sales volume was due to introduction of next generation Corolla with three different engine capacities (1.3L, 1.6L and 1.8L), along with many variants. This not only hampered the demand for City, but also weighed down on Civic’s demand, which previously enjoyed the status of the only domestically assembled car in the 1800cc engine capacity segment. Nevertheless, to counter waning sales volume, the company re-launched its existing City model with major cosmetic changes, including two additional variants during Oct’14. Moreover, the company kept prices unchanged on City model.
Keeping in view of the current price differential between City and Corolla variants, we feel timely launch of City’s facelift will somewhat limit sales decline for the company. We, however, believe the company’s sales volume will dip by 8% YoY to 21,130 units during FY15. Going forward, in FY16, we expect HCAR sales to further plunge by 22% YoY to 16,443 units because of likely phase out of the Third Generation City in 3Q FY16. The company’s sales, however, are expected to recover by 23% to 20,209 units in FY17 because of a better volume contribution from new City model and improvement in demand for Civic model.
Stable PKR to sustain healthy margins
Like other auto assemblers in the country, HCAR heavily relies on imported component to run its operations. The company imports majority of its car parts from Thailand and a small number of parts from Japan. Hence, the company’s gross profit margins are dependent on the movement of PKR/USD parity. Recall, ~7% appreciation in PKR/USD parity during 4Q FY14 (Jan-Mar) resulted in massive improvement in the company’s gross profit margins, which soared from 8.0% in 4Q FY14 to 12.7% in 1Q FY15, despite price cut offered by the company during the period. Additionally, to further increase localization levels, the company invested PKR 251mn under localization program during 2Q FY15. This resulted in additional custom duties saving for the company, which further aided the company to expand its gross profit margins to 14.2% during 2Q FY15.
Going forward, stable PKR/USD parity coupled with recent PKR/JPY appreciation, is expected to keep the company’s gross profit margins at higher side in near term. Therefore, we anticipate the company’s gross profit margins to clock in at 13.4% and 12.3% in FY15 and FY16, respectively.
With the significant improvement in the company’s operating margins despite a likely volumetric decline in the sales, the company is anticipated to post a record profitability of PKR 2,564mn (EPS: PKR 17.96) during FY15. Moreover, likely rollout of Fourth Generation City in FY16 is expected to contribute better volume to the company from FY17 onwards.
Our revised Dec15 TP for the company stands at PKR 196/sh. From its last close, stock trade at a FY15 P/E of 11.3x and provides dividend yield of 4%. NEUTRAL!
|Earnings Growth (%)||–||–||339.5||138.8||(19.0)|