By Chang-Ran Kim
TOKYO, July 25 (Reuters) - Profits at Japan's top two automakers likely took a step back in the first quarter mainly due to a weaker dollar, but analysts said their fundamentals remain solid despite a shrinking global car market.
For the April-June term, analysts on average expect group operating profits at Toyota Motor Corp and Honda Motor Co to fall by 19 percent and eight percent respectively, as the dollar lost around eight yen, offsetting a jump in the euro-yen exchange rate.
Other one-off factors such as a pullback in production to adjust inventory levels also likely put pressure on earnings, but many analysts forecast an improvement in subsequent quarters thanks to strong fundamentals and continued expansion in the fast-growing Asian markets.
A survey of six analysts by Reuters put Honda's quarterly operating profit, on average, at 157 billion yen ($1.32 billion), down eight percent from last year.
Honda's results, announced under U.S. accounting standards, are due on July 29. Toyota will report on Augst 5.
"The main factor depressing profits is currencies," said HSBC analyst Christopher Richter. He added that things should look up for Honda in the second quarter after a relatively soft performance in the same period last year.
So far this year, Honda's sales have been unmatched in its most profitable U.S. market, where local juggernauts have been leading a fierce price war with the use of huge buyer incentives to rev up slack demand.
Even with the fewest incentives in the industry, Honda's U.S. sales are up 13 percent in the year to date, compared with a slight fall in the overall market.
"Honda raised its incentives only slightly thanks to its product competitiveness, high-quality customer base and outstanding brand appeal," said Tatsuo Yoshida, an analyst at Deutsche Securities.
But that success is being offset substantially by a 30 percent drop in Japanese sales. Analysts said the launch of the remodelled Odyssey minivan in October could turn things around, although competition will remain tough amid weak consumer spending.
PRICE WARS
Meanwhile, sales at Toyota are bullish in all major markets, prompting the top Japanese automaker to raise its forecasts for global unit sales this week. It now expects a six percent rise in calendar 2003, to 5.85 million units.
But how this translates into profits is a separate issue, analysts said.
Toyota's spending on discounts and other sales incentives in the United States, while still at the lower end, doubled to nearly $1,000 at the end of last month, as it worked to reduce its stock of cars.
"They've been sprinkling incentives more liberally than Honda or Nissan," HSBC's Richter said. "I think last year might have been a peak for Toyota," he added.
Three analysts put Toyota's consolidated operating profit at an average 319 billion yen ($2.68 billion) under Japanese accounting standards, down 19 percent.
Actual results are expected to veer from the forecast, however, because Toyota will for the first time announce quarterly numbers under U.S. accounting rules.
"The key point is whether Toyota will be able to keep discounts down without this having an adverse impact on sales volume during the switchover to new year models beginning in September," said Goldman Sachs analyst Kunihiko Shiohara.
But the expected profit decline would still represent a healthier performance in real terms since profits had risen over 30 percent in the same quarter last year as Toyota produced more cars than usual to replenish its depleted U.S. inventory.
The first quarter of 2002 also saw a large extraordinary gain of 163.7 billion yen for Toyota as it returned the proxy portion of its pension fund to the government.
Among Japan's other big automakers, third-ranked Nissan Motor Co and fifth-ranked Mazda Motor Corp are to announce only revenue figures for the quarter on July 31.
Mitsubishi Motors Corp , Japan's fourth-largest carmaker, shocked the market on Thursday by revising its group net forecast to a loss of 80 billion yen from a 10 billion yen profit for the six months to September, citing financing woes in the United States, its main earnings pillar. ($1=119.03 Yen)