Equity Analysis /
Pakistan

Indus Motors: Likely to outperform peers on better sales outlook; Buy

  • We have a Buy stance with a June 2021 TP of PKR1,273/sh, based on the launch of new model Yaris

  • INDU's strong brand image and popularity in both urban and rural areas will shield its sales from rising competition

  • The stock is trading at FY 21/22f P/E of 13.4x/11.1x, justified by an expected 3yr EPS CAGR of 21% (PEG of 0.6x)

Intermarket Securities
11 March 2020
  • We reiterate our Buy stance on INDU with a June 2021 TP of PKR1,273/sh. Positives for INDU come from the imminent launch of a new 1,300cc model called Yaris, which will likely boost sales; stronger financial position relative to peers; and lower sales decline as compared to HCAR. 
  • INDU's strong brand image and popularity in both urban and rural areas will shield its sales from rising competition, unlike HCAR, where Kia Sportage is emerging as an attractive alternative to Civic in the luxury segment, while Corolla is relatively less affected, in our view.
  • The stock is trading at FY 21/22f P/E of 13.4x/11.1x, which is justified by an expected 3yr EPS CAGR of 21% (PEG of 0.6x). While Auto stocks have historically rallied late in an economic recovery, INDU can outperform the sector due to the new model launch and better sales outlook. 

More positive sales outlook than peers

We recommend Buy on Indus Motor (INDU) with a June 2021 TP of PKR1,273/sh. INDU will be the first OEM to launch a new model (Yaris) in 2020 in the backdrop of macroeconomic recovery. Hence, we expect an earlier rebound in sales compared to peers – a key reason for our liking. Another positive catalyst (medium-term) for sales would be monetary easing (potentially commencing from March). What sets INDU apart from peers is a sufficient cash balance (despite incurring cPKR6bn capex for Yaris), which has hitherto cushioned it from expensive borrowing and will allow it to remain nimble in an increasingly competitive market, in our view. These factors and an expected 3yr EPS CAGR of c21% justify premium valuations for the scrip, in our view. 

Strong brand image and market presence

INDU’s overall sales declined less sharply compared to that of Honda Atlas (HCAR) during CY 19 – down 28% yoy vs. 44% for HCAR. This is due to a stronger brand image and penetration in both the urban and rural areas. INDU, however, has seen a decline in market share from 21% to 18% in 7MFY20, which is mainly due to the increase in sales of Economy segment cars, rather than competition from Kia (as faced by HCAR in the luxury segment), in our view. From our channel checks, we understand that INDU will not face any immediate threat from new entrants, as they have not yet planned to launch a sedan. The price difference between the Kia Sportage and Toyota Grande is slightly wider compared to that with Civic. INDU also sells different versions of the Corolla, which caters to the 1,600cc and 1,800cc markets and limits competition from Civic (price is 18% higher than a 1,600cc Toyota Altis). 

Imminent launch of new model

The new model Yaris will replace the 1,300cc Corolla Gli/Xli variants, and our channel checks suggest it could be launched by early April 2020. This will arrest the sales decline for INDU; the introduction of the 11th generation Corolla in 2014 led to a staggering 45% jump in sales. We expect combined sales of the Corolla and Yaris of c30,000/33,000 units in FY 21/FY 22f, up from c27,000 units in FY 20f. Yaris will also give INDU an advantage ahead of the potential launch of a new City model by HCAR later in CY20. Lastly, INDU’s gross margins are expected to recover to average 11% from recent trough level of c9%, amid higher capacity utilisation.