THE decision by Atlas Honda Ltd to cut prices of its popular, smaller engine motorcycles this March to boost its sagging market share appears to have delivered the intended results.
The 10pc price reduction announced just before the arrival of the wheat crop pushed the sales of the fuel-efficient models — Honda CD 70 and CD Dream — ‘beyond expectations’ as reflected by the spike in its profits for the first quarter of the year 2015-16.
According to the unaudited interim profit and loss account of the company for the April-June quarter, sales grew by over 16pc to Rs13bn from Rs11.2bn in the same period a year ago.
The higher sales significantly boosted the company’s profit-after-tax by 22pc to Rs701m from Rs573m during the period under review and strengthened its earnings-per-share to Rs6.78 from Rs5.55.
The company has launched a $100m investment plan to increase its production capacity to 1m units over the next two years
Atlas Honda officials are hopeful that the growth trend will hold during the remaining three quarters till March 2016, as the company is also implementing promotional schemes and customer-based activities to improve market sentiments. The spare parts business also registered an impressive growth of 28.8pc in the year ending March.
Honda Atlas, established in 1988 as a joint venture between Pakistan’s Atlas Group of Companies and Japan’s Honda Motor Co., has two production plants in Karachi and Sheikhupura, with an annual production capacity of over 750,000 units.
The company’s market share peaked to more than 73pc during the mid 2000s before cheaper two-wheelers made their way from China into Pakistan on the back of the consumer bonanza. It was a time when the sales of two-wheelers grew exponentially to 1m units.
Honda Atlas, which has seen its share plummet to less than 50pc over the years in a market of 1.5-1.6m units, invested around $50-60m in plant expansion and modernisation in recent years and launched new models to attract customers both in the urban and rural areas of the country.
And it has launched yet another $100m investment plan to increase its production capacity to 1m units over the next two years.
“In fact, we have never stopped investing in modernisation of equipment and machinery and in capacity expansion,” a company executive told Dawn.
“The expansion plan is being undertaken not only to maintain our market leader status but also to capture a bigger slice of the pie through the launch of new models and heavier bikes,” the executive said on the condition of anonymity as he was not authorised to give statements about the company’s future investment plans.
The expansion will create 800 direct jobs, taking the total number of the company’s employees close to 5,000. “Besides new jobs at our plants, we will create thousands of new indirect jobs in the services sector,” the executive said, adding that a chunk of the planned investment will be spent on the expansion of the Sheikhupura plant.
Almost the entire investment is expected to be made from the company’s own resources, as Atlas Honda has remained debt-free over the last four consecutive years despite the heavy investments it has made during the period.
The company’s accounts for the year ending March show that it turned over more than Rs45.8bn in sales, against Rs25.5bn in 2010 — reflecting a healthy growth of 80pc over the last six years. The profit-after-tax also more than trebled during the period, from Rs712m to Rs2.35bn.
The company sold over 620,000 units last year (April 2014-March 2015) and earned an after-tax profit of Rs2.35bn, up 17.5pc from the Rs2bn it earned in the previous year.
But the annual review of the company’s performance shows that the number of units it sold decreased in the year because of economic slowdown; hence the price cut in the more-in-demand segments. However, cash sales grew slightly by under 3pc during 2014-15 from a year earlier.
“To ensure its long-term competitiveness, the company is taking steps towards developing new products, quality improvement and enhancement of customer experience, which will help improve sustainable profitability of its business in the long-term,” the report reads.
“The company remains committed to deliver on its long-term objectives of sustainable growth and value creation. This is being achieved through continued focus on operational excellence, product portfolio diversification, cost reduction and a strong capital structure.”
The two wheeler industry continues to face economic challenges, according to the review for the last year. Low disposable incomes discouraged households in rural areas from spending on consumer durable products like motorcycles. In urban markets, political instability and poor law and order situation outweighed the prospects of an increase in demand. Furthermore, availability of credit to end-consumers remained limited.
“These factors translated into stagnant growth of the two wheeler market. However, low vehicle penetration ratios and changing customer preference towards higher engine segments suggest promising market growth,” the annual review added.
The improvement in macroeconomic indicators and the reinstatement of growth momentum is also expected to push sales, according to the company’s review about the future outlook.
Published in Dawn, Economic & Business, August 24th, 2015