Equity Analysis /
Pakistan

Indus Motors: 2QFY20 analyst briefing takeaways

  • Industry sales of Passenger cars & LCVs fell 49% yoy. INDU’s market share fell to 18% in 1HFY20 from 21% SPLY

  • Due to lower yoy sales, margins are likely to stay under pressure, as per-unit fixed overheads have increased

  • They are expecting demand of cars to improve slightly for the remainder of FY20 (compared to the sales in 1H)

Intermarket Securities
2 March 2020

INDU posted 2QFY20 NPAT of PKR986mn (EPS: PKR12.54), down 71%yoy due to sharp volumetric decline. This took 1HFY20 earnings to PKR2,304mn (EPS PKR29.32), down 67% yoy. INDU also announced a second interim dividend of PKR6.0/sh (taking 1HFY20 payout to PKR13/sh).

Key result highlights

  • The company sold 7,468 units in 2QFY20, which were down 57% yoy. Industry sales of Passenger cars & LCVs fell 49% yoy, but sales of Economy cars rose 19% yoy due to the launch of new Alto by Pak Suzuki. INDU’s market share fell to 18% in 1HFY20 from 21% SPLY. Kia took about 4.2% share of the market.
  • Price increases (on account of PKR depreciation, higher taxes and higher interest rates) are attributed for the sharp decline in volumetric sales.
  • Gross margins declined by 4.3ppt yoy to 7.9% in 2Q due to an increase in input costs and fixed overheads. INDU management believes that it has not yet fully passed on the recent increases in costs. INDU also resorted to price discounts at the end of 1H in order to compete in a declining market and secure its market share.
  • The company had a capacity utilization of 45% in 2Q (40% in 1Q) and worked on a single shift due to weak demand. However, utilization levels have improved to 60%/ 65% during January/ February.
  • Other income fell 49% yoy due to a significant decline in the fund size, which is itself led by a cash drain due to decline in customer advances and inventory pile-up.

Future outlook

  • Following a 72% mom increase in sales in January, the management indicated that the positive trend continued in February. They are expecting demand to improve slightly for the remainder of FY20 (compared to sales in 1H).
  • Due to a relatively lower yoy sales, margins are likely to stay under pressure, as per-unit fixed overheads have increased. However, there can be some improvement in 3Q margins due to January price hikes.
  • The management acknowledged the imminent launch of a new 1,300cc model called Yaris, but it did not comment on the timeline. Yaris will replace the current 1,300cc cars (both the XLi and GLi), and will have the same localization level as that of the cars it will replace. As per our channel checks, Yaris may be launched as early as end of March or April 2020; it can be a major boost to INDU’s sales and market share and in turn an impetus for its stock price, in our view.
  • Regarding the Electric Vehicles policy presently being formulated by the government, under which lower taxes will be imposed on electric vehicles, INDU opines that a policy – that focuses on local production rather than concessions on CBU imports – will be more fruitful. Exact details of the policy are still awaited.
  • With regards to the global outbreak of coronavirus, the management expressed concerns about possible disruptions in their supply chain as both China and Japan are facing issues.