Dear Clients,

Honda Atlas Cars (Pakistan) Limited (HCAR) has announced a profit after tax of PKR 928mn for 1QMY22 translating to an EPS of PKR 6.50, up by 4% QoQ. The result is ahead of our estimates and street consensus which was at PKR 5.6/sh. The deviation was mainly on account of better than expected gross margins at 7.3%. The stock has traded lower after the result. We think this is because of lower-than-expected guidance on car sales. Management’s guidance of 8-9k units per quarter falls short of market estimates. We think the guidance is conservative. We think HCAR can sell over 10k vehicles in a quarter (our estimate is 43k units for MY22). The fact that the order book for New Honda City has already crossed 12k units supports our view. The car is expected to be launched today. We have already witnessed the company weather cost escalation and depict margin improvement sequentially. We have a Buy stance on HCAR trading at a forward P/E of 6.0x.

Result Takeaways:

On a YoY basis, the company saw improvement in bottom-line from a loss last year as a result of sales lull to profits this quarter. Revenue of the company has increased by 234% YoY as the company recorded vehicle sales of 7,593 units in 1QMY22 as compared to 2,329 units last year. Volumetric sales are up by 226% YoY due to the resumption of sales and low-interest-rate environment.

Gross profit margin has stood at 7.3% up by 6.5/2.1pps YoY/QoQ owing to better volumes improving operating leverage as well as price hikes. These margins were last seen in 2019.

Selling Distribution and Administrative expenses were restricted to PKR 363mn for the quarter down by 39% QoQ. Other expenses expanded with increased profitability residing at PKR 192mn. 

Other income has increased by 3.7x YoY as the company’s cash balances improved vastly owing to an influx of advances for new Honda City. On a sequential basis, the presence of exchange gains shadowed interest income earned during the quarter.

Profits before taxation improved by 32% QoQ that was overshadowed by the effective tax rate for the quarter resided at 32% as compared to 13% in the previous quarter. Resultantly, we saw only 4% sequential improvement in profits.

We reiterate our Outperform stance on HCAR with a TP of PkR420/sh. Going forward, we eye demand to remain healthy buoyed by well-received Honda City as well as the low-interest-rate environment. The company trades at a P/E of 6.0x on MY22E earnings.

Regards,
KASB Research