Equity Analysis /
Pakistan

Indus Motors: 2QFY22 Analyst briefing takeaways

  • INDU’s sales rose c.60% yoy in 2Q on the back of healthy uptick in demand following price reductions in FY22 Budget

  • According to the management, car prices are likely to increase further amid escalating costs and PKR depreciation

  • We flag INDU as our top pick in the sector, with a Buy rating (TP of PKR1,475/sh)

Abdul Ghani Mianoor
Intermarket Securities
17 March 2022

Indus Motor Co. (INDU) posted 2QFY22 NPAT of PKR4.7bn (EPS: PKR60.43), up c.60% yoy but down c.10% qoq. This was due to a c.35% yoy rise in sales (c.60% qoq rise in volumes) and a sharp c.85% yoy increase in other income. INDU also announced a DPS of PKR30 in 2Q.

Key highlights for 2QFY22:        

  • The company sold c.19,800 units (CKD and CBU combined) during 2Q, up a sharp c.35% yoy. Total industry sales during 2Q rose by a staggering c.60% yoy, albeit distorted by lockdowns last year. Sales for INDU in 2Q were the highest ever in a quarter.  

  • Despite the c.5% qoq increase in volumes, gross margins had declined by c.3ppt qoq on account of negative currency movements (both PKR/USD and PKR/JPY) during the quarter, elevated raw material costs and sea freight. These factors, coupled with delays in price increments, led to the sharp qoq decline in margins.   

Guidance for future sales and profitability      

  • In light of the recent PKR/USD devaluation of c.13% FY22td, elevated commodity prices and unprecedented shipping freight, INDU indicated that car prices are likely to be increased by a sharp 10-13% within the next week. However, the company is still debating whether to pass on costs to all consumers or only on those with deliveries after June 2022.   

  • The management indicated that the Auto sector is going through challenging times, due to pressures arising from both supply chain (raw material shortages, shipment delays and shipping freight) and cost fronts (continued PKR devaluation and elevated commodity prices). However, the management is focusing on sustaining margins through cost-cutting measures.

  • With regards to sales, as evident from the substantial customer advances (c.PKR72bn in 2Q), volumes for the remainder of FY22 are likely to remain robust (4-4.5mths order back-log). However, in light of the prevailing macroeconomic scenario (monetary and fiscal tightening) and expectations of further contraction, the company expects a 15-20% decline in sales during FY23.

  • Encouraged by the incentives in the Auto policy, INDU had announced plans of investing US$100mn over the next three years for local production of Hybrid vehicles. INDU plans on launching locally produced Hybrid vehicles soon in the market (before June 2024).    

INDU saw a yoy surge in both volumes and overall profitability in 2QFY22. Although sales are likely to remain healthy for the remainder of FY22 amid strong order back-log, volumes are likely to decline in 1HFY23, in our view, while margins are likely to be under pressure in the coming quarters. From our understanding, both fiscal and monetary tightening (increase in FED and interest rates and restrictions on auto-financing), compounded by sharp price increases and resurgence of supply-chain constraints, are likely to further dampen sales. However, any decline in total sales will be moderated by strong rural sales amid elevated farmer income, as they account for c.60% of total sales for INDU, in our view. We flag INDU (TP of PKR1,475/sh) as our top pick in the Auto space.