Equity Analysis /
Pakistan

Indus Motors: FY 19 analyst briefing: Revenues increase, but NPAT declines

    Ahmed Raza
    Ahmed Raza

    Investment Analyst

    Intermarket Securities
    25 September 2019

    In FY19, Indus Motors recorded 13%yoy increase in revenues to PKR158bn on account of higher prices/volumes but NPAT declined to PKR13.7bn (EPS: PKR174.49), down 13%yoy due to massive PKR depreciation against US$.

    The company sold 66,211 units in FY19, up 3%yoy; whereas industry volumes were 297,702 units, down 16%yoy. Industry volumes consist of imported CBUs as well, which declined by 45% yoy to 36,455 units due to regulatory changes – a de facto ban on imported cars.

    Apart from increased prices and higher interest rates, management attributed the severe decline in volumes (INDU’s unit sales down 54%yoy in 2MFY20) to the govt’s drive towards greater documentation in the country. This includes the CNIC condition on purchases above PKR50K and FBR actively pursuing non-filers. Higher prices also include the impact of FED on all cars along with 5% additional custom duty on imported parts imposed in FY20 budget. Both of the above were passed on to consumers in Jul’19.

    Due to the increased taxes, 42% of the selling price of Corolla includes government taxes now vs 37% in FY19. Continuous changes in policy is negative for the sector and as per the company, there have been 18 changes regarding automobile sector since Auto Policy 2016 was announced.

    Management refused to comment on rumors regarding a new model launch and will only speak once there is concrete development. To recall, news reports suggest that Toyota will replace Corolla Xli/Gli with another sedan, Toyota Vios.

    Another round of debottlenecking is in progress, which will add another 10K capacity, taking annual capacity to 76k units (without overtime).

    Management thinks they will be able to sell c.3k units per during 2HFY20 but strength of recovery afterwards will depend on economic conditions. Gross margins may decline slightly only during FY20. FY20 volumes may settle between 150-160k units for the overall industry.

    On new players, the management is not very concerned. Major issue for them is the current economic condition which has resulted in market contraction. The company is also wary of possible concessions being granted to CBU imports of electric vehicles, where they think should be available for only those parts which are not produced locally

    We have a Buy stance on INDU with a Jun’20 TP of PKR1,230/sh.

    Risks: (i) Significant PKR depreciation against USD and JPY, (ii) entry of new players In sedan category, and, (iii) Below expected sales due to FED on cars.