Earnings Report /
Pakistan

Indus Motors: Q2 FY 20 review: Lower margins and other income led to earnings miss

    Intermarket Securities
    19 February 2020

    Indus Motors (INDU) reported 2QFY20 NPAT of PKR986mn (EPS: PKR12.54) down 71% yoy and 25% qoq, lower than our EPS expectation of PKR15.42. This takes 1HFY20 earnings to PKR29.32. The company also announced a second interim dividend of PKR6.0/sh, below our expected DPS of PKR7.0/sh (1QFY20 DPS of PKR7/sh).

    Major deviations from our estimate were (i) lower gross margins and (ii) lower other income.

    Key highlights: 

    • Revenue of PKR22bn, up 6%qoq due to an 11%qoq increase in volumes to 7,468 units compared to 6,700 units in the previous quarter. This was likely due to extensive discounts and promotions offered by the company during the quarter. On a yoy basis, however, 2Q sales fell 47% due to 57% yoy decline in volumes.
    • Gross margins of 8% have dropped by 1.7ppt qoq, potentially due to an increase in overheads per unit, in our view, where INDU had 15 non-production days during October 2019. This was a similar theme in HCAR's 3Q20 result as well. We had expected margins to be around 9.5% for the quarter. GP margins have fallen 4ppt yoy due to lower sales and cost escalation amid sharp PKR devaluation (not fully offset by price increases).
    • Distribution expenses have risen 10% yoy, which could be attributed to the ramp up in advertising and promotions in a declining market. Good sales performance in January 2020 indicate fair results. On a sequentially basis though they have declined 16%.
    • Other income saw a 23% qoq and 49% yoy decline. This is potentially due to decline in customer advances, which resulted in lower cash balances.
    • Effective tax rate of 30% compared to 26% in the previous quarter (potentially owing to lower contribution from other income).

    We have a Buy rating on INDU with a TP of PKR1,343/sh. Key reasons for our liking are: (i) strong brand image (higher margins than peers), (ii) better cash position, and (iii) relatively less exposed to new competition. The expected launch of new model Yaris (which will replace Corolla Xli/Gli) is a key positive trigger for the stock.