Earnings Report /
Pakistan

Autos 2QFY20 preview – Volumes continue to slide but gross margins may pick up

    Intermarket Securities
    23 January 2020
    • For Oct-Dec’19 results, we expect Pak Autos to post combined NPAT of PKR285mn, down by a sharp 93%yoy and 57%qoq. While volumes were down by a moderate 5%qoq during Oct-Dec'19, the decline in profitability is sharp due to working capital issues (resulting in higher finance cost or reduced other income).
    • Gross margins may inch up due to slight appreciation in PKR (up 1% against US$ in 2Q) and sharp price increases in Alto (c.15%) during Sep'19, which is now the highest-selling variant in Pakistan. The latest round of price increases (by all OEMs) were effective from Jan'20 and will reflect in future results.
    • We have a Marketweight stance on the sector as premium valuations adequately reflect the rebound in growth (expected from FY21 onwards). We have a Buy on INDU but are Neutral on HCAR and PSMC.

    Working capital woes will further drag profits

    Pak Suzuki Motors (PSMC) is expected to post a loss of PKR1,161mn (LPS: PKR14.11) in 4QCY19, taking CY19 losses to PKR3,855mn (LPS: PKR46.84). In 4Q, we expect gross margins to slightly recover to 1.9% (vs -0.9% in 3Q) primarily on the back of price increases in Alto. However, finance cost is expected to be up by 62%qoq amid buildup in short-term borrowing. Due to thin margins, PSMC comes under minimum taxation (on a revenue basis) but in 9MCY19, the company has booked tax reversals of PKR1,077mn (PKR32.64/sh), on account of deferred tax asset. Hence in 4Q, we have not booked any taxation charge due to management discretion involved. Based on our 4Q sales estimate, the turnover tax can amount to PKR369mn (PKR4.49/sh). 

    We expect Honda Atlas (HCAR) to post 3QMY20 NPAT of PKR247mn (EPS: PKR1.73), down 51% qoq. Major reasons include sharpest qoq decline in volumes among peers (down 17%) and normalized other expenses (HCAR booked Fx gains in 2QMY20), despite our assumption of stable gross margins (10.5%) during 3Q.

    Profits of Indus Motors (INDU) are also expected to be down by 8%qoq to PKR1,206mn (EPS: PKR15.35). Even though sales picked up by 11% qoq, major drag will come from lower Other income (down 39%qoq), as short-term investments/ cash balances have declined significantly. We expect INDU to announce a second interim dividend of PKR7.0/sh, taking 1H DPS to PKR14.0.

    Weak volumes will constrain payouts by tractor OEMs

    Tractor volumes were down by 46%yoy / 38%qoq to 5,824 units during 2QFY20. The steep sequential decline compared to Auto OEMs can be attributed to (i) higher farm input cost, where tractor purchase gets delayed and (ii) seasonally weak period for new equipment sales. During 2QFY20, Millat Tractors (MTL) will outperform its peer, Al-Ghazi Tractors (AGTL), primarily due to lower volumetric decline in the period. Reduced profits and buildup in sales tax receivables will be reflected in lower dividends, in our view.

    Marketweight stance but weak results can open entry points

    We have a Marketweight stance on the sector as it is trading at FY21f P/E of 8.2x, compared to 7.0x for IMS Universe, reflecting future growth in the sector. 

    INDU is our top pick, with a Jun’20 TP of PKR1,373/sh, due to lower chances of competition in the Sedan segment and potential launch of a new model (Toyota Yaris) to replace the Corolla in the 1,300cc segment. We also like PSMC (Dec’20 TP: PKR265/sh, Neutral) as it will continue to benefit from curbs on imported CBUs while multiple price hikes in 2H19 should lift margins in the coming quarters, in our view.

    Risks: (i) PKR depreciation against Yen and US$, (ii) adverse regulatory measures and (iii) competition from new players.