JS Securities Limited - JS Research (August 03, 2022)

Brokerage

JS Securities Limited – JS Research (August 03, 2022)

August 3, 2022

Karachi, August 03, 2022 (PPI-OT): HCAR: ‘Gearing’ for a tough year ahead

The ongoing challenges from the macro situation that have led to higher interest rates, have curbed auto financing with share of auto financing sales dropping to 30% from 47% during lower interest rate environment.

Management expects demand for existing models to decline by 30% following spike in car prices due to devaluation. Some respite is however likely from launch of the HRV. In terms of margins, management expects margins to trim to ~3% from 6% reported in 1QMY23, assuming no further devaluation or price hikes; where current prices incorporate parity at PKR235/US$.

Higher prices support margins for now

Honda Atlas Cars Limited (HCAR), held its Analyst Briefing yesterday to discuss financial highlights for the year ended March 2022 (MY22) and 1QMY23 (quarter ended June-22) along with future outlook. To recall, HCAR posted 1QMY23 EPS of Rs4.6, down 29% YoY and up 2.3x QoQ. Sequential improvement came on the back of improving margins post multiple price hikes. Overall volumes were down 10% QoQ, while high interest rates (up from 7% in Sep-21 to 15% currently) has also altered the sales mix, where auto financing backed sales now contribute 30% of sales vs 47% earlier.

During MY22, total market for passenger cars (including KIA and other new players) clocked in at 232k units up 62%YoY in which HCAR captured a market share of 16%, whereas INDU/PSMC/Hyundai/KIA captured market shares of 24%/46%/4%/10% respectively. Sales mix of HCAR remained tilted towards urban sales accounting for 65% of the total with rest from rural areas whereas in terms of sales volume, 65% sales came from City, 25%-30% from Civic and remaining from BRV.

Cost pressures could take a toll on margins

Localization in terms of parts for HCAR currently stands at 70%/60%/50% for City/Civic/BRV, however, due to unavailability of hi-tech parts such as engine and transmission components, localization in terms of value remains far less in the range of 25%-30%. As per the management, the production of these high value parts requires higher volume in the industry for it to become feasible. Due to this the company relies significantly on imports to meet its raw material requirements and hence faces currency exposure. 70% of the currency exposure is in US$ terms whereas 20%/10% is to THB and JPY respectively.

The ongoing unprecedented PKR depreciation has led to multiple rounds of price hikes by HCAR since Nov-2021, with the latest price hike announcement made last week. As per the management, current prices incorporate a US$ rate of 235, and assuming stable PKR with no further price hikes may shed company’s margins from 6% to 3%-3.5% in the coming quarters.

Volumes to take a hit by multiple factors

The delay in import of CKD kits continues to hamper production in the industry. The management apprised that the State Bank of Pakistan (SBP) has been delaying clearance of LCs, leading to 2 non-production days during the quarter for HCAR so far and may increase further.

In Jul-2022, auto companies were allowed to import 50% of their total average imports over the last 4 months as a way to limit the country’s import bill. The quota was increased to 60% in Aug-2022 and is expected to be 70% hereon.

In addition to that, with aggressive cost led price hikes, decline in demand for auto financing amid high interest rates and measures taken by the regulators, management anticipates a decline of up to 30%-35% in volumes during MY23. However, along with disclosing its plans to launch HRV, management commented that decline in volumes may be contained to some extent.