Earnings Report /
Pakistan

Indus Motors: 1QFY23 Review - Earnings slump on record gross losses

  • INDU reported 1QFY23 EPS of PKR16.50, lower than our expectation of PKR18.45 owing to lower revenues and gross losses

  • Gross margin clocked in at -6.3%, vs. IMS estimate of 0.9%, largely owing to lower realization of phased price hikes

  • Despite the weak result, we continue to prefer INDU as our top pick in the sector with a TP of PKR1,280/sh

Intermarket Securities
27 October 2022

Indus Motors Ltd (INDU) has reported 1QFY23 NPAT of PKR1.3bn (EPS: PKR16.50), down a sharp 76% YoY but up 155% QoQ. The result is lower than our estimated EPS of PKR18.45, where the deviation largely stems from a gross loss of PKR2.4bn (-6.3% margin), even wider than that witnessed in 4QFY20 (pandemic). The result was accompanied with an interim DPS of PKR8.20, slightly lower than our DPS expectation of PKR9.00.      

Key result highlights for 1QFY23:

  • INDU has depicted a 43% YoY decrease in sales to PKR37.2bn, owing to the 52% YoY decline in volumes. Revenue clocked in lower than our estimate of PKR42.7bn, likely owing to lower-than-expected realized car prices.    

  • Gross margin turned negative, declining by 17.1ppt YoY/7.5ppt QoQ to a record low of negative 6.3%, even lower than the pandemic levels. This is lower than our margin expectation of +0.9%. The sharp decline is largely attributed to i) intermittent plant closures, ii) phased price increases, and, iii) PKR slippage.

  • Other income has surged to PKR5.2bn, more than double that of the previous year (flat QoQ), owing to significantly greater cash balances amid longer lead times and higher interest rates. We expect cash balances to reduce in the ongoing quarter owing to closure of bookings and working capital requirements.   

  • Among other line items: i) distribution expenses reduced by 18% YoY due to lower volumetric sales, and ii) INDU reported an ETR of 29% vs. our estimate of 33%.

INDU has posted back-to-back disappointing results, and is so far the only Auto OEM that reported a gross loss (e.g. PSMC had a gross profit), despite multiple price hikes since Apr’22. However, various challenges prevail in the form of i) weaker demand amid higher interest rates, ii) lower rural area demand due to the recent floods and crop damage, and iii) continued production constraints from SBP’s regulations to restrict CKD imports. We continue to prefer INDU as our top pick in the auto space, and would look to accumulate on dips. We currently have a Buy stance on INDU with a target price of PKR1,280/sh.