Equity Analysis /
Pakistan

Indus Motors: 1QFY22 Analyst Briefing Takeaways

  • INDU’s sales rose c.60% yoy amid sharp rise in both CKD and CBU units following the incentives announced in FY22 Budget

  • According to the management, car prices are likely to be increased in two phases, within the next few days

  • We flag INDU as our top pick in the sector, with a Buy rating (TP of PKR1,500/sh)

Abdul Ghani Mianoor
Intermarket Securities
9 November 2021

Indus Motor Co. (INDU) posted 1QFY22 NPAT of PKR5.4bn (EPS: PKR69.02), up 23% qoq (c.3x yoy, distorted due to Covid-19 lockdowns). This was due to a 37% qoq rise in sales (c.60% qoq rise in volumes) and a sharp c.90% increase in other income. INDU also announced a DPS of PKR34.5 in 1Q.

Key highlights for 1QFY22:        

  • The company sold c.18,850 units (CKD and CBU combined) during 1Q, up a sharp c.60% yoy. Total industry sales during 1Q rose by a staggering c.95% yoy, distorted by Covid-19 lockdowns last year.  On a qoq basis, sales surged following the incentives in the FY22 Budget. 

  • Despite the 28% qoq increase in volumes, gross margins had declined by c.1.5ppt qoq on account of negative currency movements (both PKR/USD and PKR/JPY) during the quarter, elevated raw material costs and sea freight.     

Guidance for future sales and profitability      

  • In light of the recent PKR/USD devaluation of c.8.2% FY22td, elevated commodity prices and port congestions globally (resulting in 2-3 week delays and air shipments), the company indicated that car prices are likely to be increased within the next few days. Prices are likely to be increased by a total of 5-6% in two phases.  

  • In order to counter the negative impact of the above mentioned factors, the company guides margins will decline sequentially in 2Q, where the upcoming price increases are likely to lift margins in 2HFY22. INDU plans on increasing volumes in order to cushion the decline in margins.

  • As per the management, INDU is not facing any issues caused by the current global shortage of semiconductor chips, unlike peers, which are facing production delays due to the shortage. This is due to aggressive procurement of parts post-lockdown (stocking up of parts).

  • The management believes that the company is unlikely to face any major delays in production for at least the next six months on account of availability of parts (maximum 5-7% of orders may face delays, if at all).

  • Encouraged by the incentives in the FY22 Budget, INDU recently announced plans of investing US$100mn over the next three years for local production of Hybrid vehicles. It also announced plans to increase capacity by c.20% by April 2022, where the incremental production will cater to the increase in demand for premium segment (Fortuner and Revo).    

INDU saw a surge in both volumes and overall profitability in 1Q. The sharp rise in auto-financing and long lead times are likely to keep volumetric growth afloat in the coming quarter, where timely procurement of parts will play in INDU’s favor, in our view. However, the passing-on of costs – in a gradual and phased manner – may keep margins in check, while a potential slowdown in economic activity amid expected monetary tightening is a key risk to our thesis. The announcement of the highly awaited Auto Policy is a key upside trigger for the sector. We flag INDU (TP of PKR1,500/sh) as our top pick in the Auto space.