Earnings Report /
Pakistan

Indus Motors: 4QFY22 review – earnings plunge on dismal gross margin

  • INDU posted 4QFY22 EPS of PKR6.48, down a sharp c.90% YoY, significantly lower than our expectations due to dismal GMs

  • GMs declined 11.1ppt YoY, owing to sharp PKR depreciation, elevated commodity prices and lagged price hikes, in our view

  • We currently have a Buy stance on INDU with a target price of PKR1,416/sh

Intermarket Securities
30 August 2022

Indus Motors Ltd (INDU) has reported 4QFY22 NPAT of PKR0.5bn (EPS: PKR6.48), down a sharp c.90% YoY, taking FY22 NPAT to PKR15.8bn (EPS: PKR201.04), up 23% YoY. The result significantly missed our estimated EPS of PKR24.93, where the deviation largely stemmed from lower-than-expected gross margin of just 1.2% and higher selling expenses, which resulted in an operating loss for INDU for the first time since 4QFY20. The result was also accompanied with a final DPS of PKR3.25, much lower than our DPS expectation of PKR12.50, taking full-year FY22 payout to PKR93.75/sh.     

Key result highlights for 4QFY22:

  • INDU has depicted a c.50% YoY increase in sales to PKR72.1bn, in line with our expectations, owing to both a 23% YoY rise in volumes and multiple price hikes during the year.   

  • Gross margins declined by 11.1ppt YoY to 1.2%, lowest since the pandemic levels, and significantly lower than our expectation of 6.9%. The sharp decline is largely attributed to i) sharp PKR slippage and volatility, ii) elevated commodity prices, and, iii) lagged price hikes, in our view.

  • Other income has surged to PKR5.2bn, more than tripling versus the previous year, owing to greater cash balances amid long lead times and higher interest rates. INDU had cash equivalents of c.PKR130bn (c.PKR1,665/sh) at the end of 3QFY22.  

  • Among other line items: i) distribution expenses surged by 35% YoY due to higher volumetric sales, ii) admin expenses increased by 74% YoY, and iii) INDU reported an ETR of 88% amid one-off high supertax and potential imposition of turnover tax, in our view. We expected an effective tax rate of 71%.

INDU has posted a disappointing result, and this made them the only OEM that reported an operating loss, despite multiple price hikes during the quarter. However, the dismal margins have likely bottomed-out and will improve in the ongoing quarter, as the phased price hikes are likely to be fully implemented, in our view. Going forward, FY23 will likely be challenging for the company, owing to i) weaker demand amid higher interest rates, ii) lower rural area demand due to the recent floods and crop damage, iii) production constraints from SBP’s regulations to restrict CKD imports. Having said that, announcement of new models (especially the highly awaited HEV segment) may provide some support. We currently have a Buy stance on INDU with a target price of PKR1,416/sh.