Equity Analysis /
Pakistan

Indus Motors: Q4 FY 19 – Earnings beat due to higher other income and lower tax charge

    Ahmed Raza
    Ahmed Raza

    Investment Analyst

    Intermarket Securities
    27 August 2019

    INDU posted Q4 FY 19 NPAT of PKR3.5bn (EPS: PKR43.99), down 16% yoy but up 3% qoq, significantly higher than our expected NPAT of PKR2.8bn (EPS: PKR35.59). The deviation was mainly from higher other income and lower tax charge, while gross profits came in lower than expected. This took FY 19 profits to PKR13.7bn (EPS: PKR174.49), down 13% yoy. INDU also announced a final dividend of PKR27.5/sh, taking full-year DPS to PKR115.0.

    Key highlights: 

    • Gross margins declined to 10.5%, slightly below our expected 10.9%, as the company is not completely passing on the impact of PKR depreciation.
    • Other income declined by only 6% yoy despite a decline in advance bookings (delivery period ranged c2-3 months a year ago compared with instant delivery now).
    • Lower effective tax rate of 17%, possibly due to capex credits. INDU is enhancing its capacity via a de-bottlenecking exercise, while a new model roll-out (Toyota Vios to replace Corolla Gli/Xli) might also be on the cards (not confirmed by the management).
    • On PBT basis, profits (down 35%) were in line with our expected decline of 32% yoy.

    In FY 19, NPAT is down 13% yoy mainly due to PKR depreciation of  24% (where cost pressures were not completely passed on during later rounds of PKR depreciation) and lower sales of high-priced Fortuner/Hilux compared with Corolla.

    Our TP of PKR1,270/sh for INDU implies a Buy stance. Near-term volumes will likely remain under pressure due to higher prices, but there are several mitigating factors for INDU over the medium term. These include superior branding in the industry to tackle new competition and the potential launch of 12th generation Corolla in Pakistan (the current generation has completed its life cycle of 5-6 years).

    Risks: (i) Significant PKR depreciation against US$ and JPY, (ii) the entry of new players in the sedan category, and, (iii) below expected sales due to FED on cars.