Indus Motors (INDU) reported 3QFY20 NPAT of PKR2,679mn (EPS: PKR34.09) down 20% yoy, while up a staggering 172%qoq, much higher than our EPS expectation of PKR19.56. This was led by (i) higher than expected gross margins at 12.1% and (ii) sharp rise in other income. This took 9MFY20 earnings to PKR4,984mn (EPS: PKR63.41). The company also announced a third interim dividend of PKR10/sh, higher than our expected DPS of PKR6.0/sh. This takes 9MFY20 DPS to PKR23/sh.
3QFY20 Review highlights include:
INDU depicted a strong 50% sequential rise in sales to PKR33,055mn, (although lower by 20%yoy), in-line with our expectations. This recovery was led by a sharp 49%qoq increase in volumes to 11,125 units vs. 7,468 units in 2QFY20, likely due to extensive discounts and promotions offered by the company during the quarter.
Gross margins rose 4ppt qoq to 12.1%, much higher than our expected GMs of 8.0%. This may be due to (i) decrease in overheads per unit (ii) price increase during January, in our view. Macroeconomic improvement, in the form of lower inflation and relatively stable PKR, may also have led to the improvement in margins, in our view.
Distribution expenses have risen 25% yoy (up 48%qoq), which could be attributed to the ramp up in advertising and promotions, to revive declining sales. Admin expenses remained flattish for the year, while improving by 7% on a quarterly basis.
Other income saw a whopping 109% qoq and 5% yoy increase to PKR1,110mn. This is potentially due to an increase in customer advances and sales which resulted in higher cash balances, in our view. INDU had an effective tax rate of 31%, compared to 30% in the last quarter.
This is a strong set of results by INDU. Although upcoming quarters may witness a slump in sales, we expect this dry spell to reverse as the economy begins to turn the corner in FY21. We have a Buy rating on INDU with a TP of PKR1,273/sh. Key reasons for our liking are: (i) strong brand image (higher margins than peers), (ii) better cash position, and (iii) relatively less exposed to new competition. The launch of new model Yaris and recent monetary easing are key triggers, in our view.