Equity Analysis /
Pakistan

Pak Autos 3Q20 Previews: Profits to rise qoq due to moderate pick-up in volumes

  • PSMC is expected to post a loss of PKR664mn (LPS:PKR8.06) in 1QCY20 & expect gross margins to recover to 4.9% from 3.1%

  • HCAR is expected to post 4QMY20 NPAT of PKR306mn (EPS:PKR2.14) vs NLAT of PKR41mn (LPS:PKR0.29/sh) in 4QMY19

  • INDU is expected to post 3QFY20 NPAT of PKR1,537mn (EPS: PKR19.56), up 56%qoq led by sales pick up of 49% qoq

Intermarket Securities
16 April 2020

For Jan-March 2020 results, we expect Pak Autos to post combined NPAT of PKR442mn, down sharply by 87%yoy. This will however be an improvement from a cumulative net loss in the previous quarter. Volumes during 3Q were down by a moderate 6%qoq. Profitability will improve due to the price hikes in January and a stable PKR for most of the period.

The improvement may however be short-lived as (i) INDU announced price hikes for all models in April, in light of the recent PKR depreciation (likely to be followed by other OEMs), and (ii) low utilization levels amid the lockdown may lead to an increase in overhead costs, in our view.

We have a cautious stance on the sector as we expect a delay in the pickup of demand for cars due to the ongoing lockdown. However, we prefer INDU in the space for its strong competitive position and balance sheet strength.

Overall profitability for the OEMs to improve in 3Q

Pak Suzuki Motors (PSMC) is expected to post a loss of PKR664mn (LPS: PKR8.06) in 1QCY20, relatively lower vs a loss of PKR981mn (LPS: PKR11.92) in 1QCY19. We expect gross margins to recover to 4.9% (vs 3.1% in 4QCY20) primarily on the back of price increases. However, due to poor sales this quarter (volumes declined 38% qoq), this benefit is likely to be trimmed by increased overheads, in our view. Due to thin margins, PSMC comes under minimum taxation (turnover tax), but the company booked tax reversals of PKR2.4bn in CY19, on account of deferred tax asset. Hence for 1Q, we have not assumed any taxation charge due to the management discretion involved. Based on our 1Q sales estimate, turnover tax can amount to PKR257mn (PKR3.13/sh). 

We expect Honda Atlas (HCAR) to post 4QMY20 NPAT of PKR306mn (EPS: PKR2.14), against a NLAT of PKR41mn (LPS: PKR0.29/sh) in 4QMY19. Major highlights include the sharpest qoq increase in volumes among peers (60% yoy) and sequentially higher gross margins of 7.0% vs 6.6% last quarter. This brings MY20 NPAT to PKR1,016mn (EPS: PKR7.12), down 74%yoy, amid sales volume decline of 54%yoy. The potential launch of new City model is a major catalyst for the stock; HCAR might be keen on launching it later in 2020 given INDU has already launched a potential competitor Yaris. 

We expect a sharp rise in profits for Indus Motors (INDU) to PKR1,537mn (EPS: PKR19.56), up 56%qoq led by sales pick up of 49% qoq (but down 34% yoy). Other income is expected to decline by 15%qoq on cash depletion. We expect INDU to announce a third interim dividend of PKR6.0/sh, taking 9M DPS to PKR19.0. INDU also launched a new model Yaris at the end of the quarter, which promises to boost sales in the coming quarters. However, it increased prices in April, following recent 8% PKR depreciation (and will likely be followed by other OEMs); this could delay or moderate recovery in sales, in our view. 

Stronger volumes to increase profitability of tractor OEMs

Tractor volumes were up by 42%qoq (but down 37%yoy) to 8,235 units during 3QFY20. This can be attributed to a seasonally strong period for new equipment sales (seen historically). Al-Ghazi Tractors (AGTL) saw a doubling of sales (102% qoq) in 3Q, compared to a 22% qoq increase for Millat Tractors (MTL). 

We prefer INDU

INDU is our top pick in the sector with a June 2021 TP of PKR1,273/sh, backed by a strong competitive position in the Sedan segment and launch of the new model Yaris which can be a key sales catalyst. INDU also has stronger financials among peers, with sufficient cash and short term investments. However, we have a cautious view on the sector as the county-wide lockdown will lead to declining sales in 4Q and delay the recovery in demand.