One thing is for sure, market leader Atlas Honda (PSX: ATHL) is going nowhere. The company's market leadership has shown no sign of fatigue despite depleting earnings and a less than rosy outlook on two-wheeler demand. Its quarterly financial results ending June-19 show earnings drop by 30 percent despite a 3 percent rise in the top-line brought forth by 11 percent rise in volumetric sales. But its market share in the 2-wheeler segment has grown from 53 percent to a whopping 70 percent in the Apr-Jun 2019 period against this period last year.

The company's poor earnings performance is largely due to higher costs of production as devaluation of the rupee against dollar and yen raised the cost of imports. Higher fuel and power costs has also added costs burden. As a result margins shrank to 7 percent from 10 percent.

The company has kept a good control over its overheads—as administrative, marketing and operation expenses remained 3 percent of revenues. The company's promotional activities have remained at the same level as last year. Higher interest rates may have increased the financial cost burden (finance costs remain inconsequential as they are less than 0.1 percent of revenues) but income earned on bank charges also grew.

Revenue per unit (as calculated) represents a 7 percent decline, even though the company raised prices for many of its motorcycles. Products sold fetched lower average price. The company's falling margins is a sign that increasing cost of production any further may persuade the company to raise prices. However, demand outlook remains bleak as disposable incomes decline across the board, but particularly critical for the motorcycle buying segment in rural areas and low middle income urban areas. Though Honda's motorcycles are currently leading the market, competition in the lowest segment of motorcycles has always been tough. Price increase motivations will account for that.

The recovery to the economy post-IMF will come but will take time. Current higher tax burden and inflationary pressures is not a conducive environment for motorcycle or car purchasing, though so far, Honda's motorcycles are still volumetrically growing.

Copyright Business Recorder, 2019