INDU held its Analyst Briefing Session today to discuss the recent financial performance, also painting a lackluster outlook for FY23 amid import restrictions on CKD imports owing to external challenges. To recall, INDU posted a dismal EPS of PKR6.48 in 4QFY22 (FY22 EPS of PKR201.04), largely owing to significant gross margin attrition (near-pandemic levels), lower than both PSMC and HCAR, and a large one-off supertax. Going forward, FY23 is positioned to be a challenging year, owing to expectations of depressed volumes.
Guidance for future sales and profitability
In light of the administrative measures taken by the SBP on CKD imports, yet to be eased, INDU is currently operating at depressed 45-50% utilization levels. In a normalized environment, the management expects a 40% decline in volumes (similar to our estimated decline of 40% for FY23).
High interest rates, coupled with recent devastation caused by floods, are likely to dampen volumes in FY23. To recall, nearly 60% of sales for INDU is generated by the rural segment, which has faced the brunt of the impact of floods.
As expected, another round of prices increases are likely. To recall, INDU had reduced prices by an average 7% in Aug’22 due to appreciation in PKR (prices locked below the PKR212 level, in our view). Therefore, a 7-8% increase in prices may be warranted.
The management remained tight-lipped with regards to gross margins outlook, as the company is yet to realize the full pass-on of costs from the recent price hikes. Hence, 1QFY23 has also been challenging, with the company likely to post similar dismal margins, in our view.
With regards to the HEV plant, investments are already underway and the company is on track to launch its first HEV in 2023, despite SBP’s administrative measures towards import curtailment.
According to management’s guidance and our estimates, INDU has an order backlog of c.15,000 cars. The coming months are likely to add to the woes of the sector, owing to PKR volatility and potential decline in rural sales (floods). With clarity yet to be received on the easing of administrative measures, production is likely to remain hampered in 2Q as well. Elevated interest rates and inflation will further slowdown sales in FY23. 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, but look to revise our estimates.