Even taking into account Japanese carmakers' traditional conservatism, analysts said the guidance was exceptionally low given Honda's forecast that its global car sales were set to increase 7.7 percent to a record 3.935 million.
Honda, which last year overtook Nissan Motor Co. as Japan's No.2 automaker, said sales would continue to grow in all regions except Japan, driven by the popular CR-V SUV, Fit subcompact and the soon-to-be-redesigned Accord sedan.
Tokyo-based Honda forecast net profit of $4.86 billion (575 billion yen) for the year to end-March 2008, well below the market's consensus estimate for $5.40 billion (641 billion yen). At an operating level, it predicted profit of $6.48 billion (770 billion yen), down 9.6 percent.
"The forecast for 2007/08 is extremely weak," said Koji Endo, an auto analyst at Credit Suisse Securities.
Honda's forecasts are based on an assumed average dollar rate of 115 yen, against a more favorable 117 yen in 2006/07. Honda expects the euro to weaken by 1 yen to 150 yen.
The stronger yen would knock $683.8 million (81.2 billion yen) off its operating profit, Honda said.
"All in all, if you strip out currency headwinds and other special factors, our business should grow this year," Executive Vice President Satoshi Aoki told a news conference.
Still, Honda's operating margin would drop to 6.6 percent from 7.7 percent in 2006/07 as it makes less money on each car sold due to the popularity of cheaper, smaller cars such as the Fit/Jazz subcompact.
Honda and other automakers have been forced to offer hefty incentives to shift bigger vehicles as consumers increasingly seek better fuel economy.
Senior Managing Director Koichi Kondo, who is set to replace Aoki in June, said Honda was spending about $2,000 in incentives on each Ridgeline pickup and more than $1,000 on the Pilot SUV in the United States. He said the automaker planned to spend a little less than $900 per vehicle in incentives in North America this business year, slightly less than in 2006/07.
Also pressuring margins are high precious metals and aluminum prices, which are expected to outstrip cost cuts.
ROOM FOR OVERSHOOT?
Despite the headwinds, most analysts say Honda's prospects for steady growth are good thanks to its fleet of fuel-efficient cars amid high fuel prices.
As big U.S. rivals scale back production to reflect a loss of customers to Japanese brands, Honda is to add more capacity in North America, including a new factory in Indiana next year.
Top Japanese automaker Toyota Motor Corp. is also expected to grow this year, albeit at a slower pace, while analysts say third-ranked Nissan faces tough hurdles to convince consumers to buy its cars over rival products.
For January-March, Honda's net profit fell 20 percent to $1.48 billion (176.18 billion yen) due to a one-off $1.16 billion (138 billion yen) pension related gain a year earlier.
Quarterly operating profit fell 27 percent to $2.11 billion (250.22 billion yen), while sales grew 9 percent to a record $26.01 billion (3.088 trillion yen).
Car sales in the quarter rose 6.2 percent to 957,000 units fueled by brisk sales of the CR-V and Civic models in North America and Europe. That made up for the chronic weakness in domestic sales.
"The company is assuming conservative foreign exchange rates while being aggressive about research and development costs," said Fujio Ando, senior managing director at Chibagin Asset Management. "I have a feeling it will revise up its forecasts in the future."
Honda is factoring in research and development spending of $4.97 billion (590 billion yen) this year, up nearly $336.9 million (40 billion yen) from 2006/07.
Among other Japanese automakers, Toyota unit Daihatsu Motor Co. forecast a sharp drop in profits this year after a strong rise in 2006/07, when it overtook Suzuki Motor Corp. to become the top seller of 660cc minivehicles for the first time in its 100-year history.
Truck maker Hino Motors Ltd., also part of Toyota, predicted another double-digit fall in earnings this year on weak truck demand.
Honda forecast an 11 cents (13 yen) increase in its dividend this year to 67 cents (80 yen).