Earnings Report /

Pakistan Autos: Rise in margins to lift profitability in 2Q results

  • Despite the softer qoq growth in sales in 2QFY21, we estimate the IMS Autos Universe to post a combined NPAT of PKR2.9bn

  • PSMC is expected to make a profit before tax for the first time in 8 quarters, of PKR245m

  • We prefer INDU as our top pick in the autos space (TP of PKR1,458/sh) and MTL (TP of PKR1,330/sh) in the tractors space

Intermarket Securities
14 January 2021

For October-December 2020 results, we expect our Auto Universe to post combined NPAT of PKR2.9bn, up from a profit of PKR2.4bn last quarter, on the back of soft 8% qoq growth in volumetric sales. HCAR was the only OEM which saw a decline in sales qoq, moderating the overall sales growth.

INDU, however, outperformed both PSMC and HCAR, with a c.25% qoq growth in sales thanks to the new model Yaris, which lifted its market share by 3ppt qoq. Despite greater volumes and a c.4% qoq PKR/US$ appreciation, industry margins may not improve commensurately due to supply issues with imported parts. 

Despite the c.6% rally by the sector in the past three months, we maintain our Marketweight stance on the sector, where we expect sales to sustain the positive momentum following the new-year phenomena. Our top pick remains INDU (Buy, TP of PKR1,458/sh).

Momentum in profitability to sustain in 2Q

Despite achieving the quarterly sales of over 20,000 units for the first time in CY20, we expect Pak Suzuki Motors (PSMC) to post a loss of PKR146mn (LPS: PKR1.78/sh), which includes a turnover tax of PKR391mn (PKR4.75/sh). Having said that, we expect gross margins to improve by 0.5ppt qoq because of (i) higher Cultus and Wagon-R sales (up an average 27% qoq) and, (ii) multiple price hikes, where prices of most models had been increased. We, however, estimate that PSMC will make a profit before tax for the first time in eight quarters, of PKR245mn.

For Honda Atlas (HCAR), our expectation of flat qoq earnings largely stems from the meagre sales during the quarter, due to the overwhelming response for Toyota Yaris which overshadowed the combined sales of the Civic and City by c.25%. However, we expect higher gross margins of 7.4% vs 6.8% in the previous quarter amid slightly higher sedan contribution to revenue over the BRV, resulting in our estimated NPAT of PKR665mn (EPS: PKR4.66). The potential launch of the new City model is a major catalyst for the stock; Catalyst for the stock. We upgrade our stance on HCAR from Neutral to Buy (TP of PKR365/sh).

Indus Motors (INDU) is expected to post an NPAT of PKR2.4bn (EPS: PKR30.87), due to the sharp c.25% qoq increase in sales, led not only by the Yaris but also by other premium models such as the Corolla and Fortuner. We expect GMs to rise due to the increase in contribution from the higher-margin cars. Other income is expected to remain over the PKR1bn level, with the sharp rise in orders (deliveries available from February onward). However, the ongoing supply issues, if prolonged, may keep margins in check, in our view.

Tractor volumes were up by a modest 3% qoq to 11,036 units during 1HFY21. Millat Tractors (MTL) saw a decent 15% qoq rise in sales, compared to a 22% qoq decrease for Al-Ghazi Tractors (AGTL). We expect profits for the two Tractor companies to remain broadly flattish sequentially.

Industry sales are likely to accelerate from January onwards

According to channel checks, the OEMs have strong order backlogs at present, where we expect volumes to accelerate from January onwards (lackluster in December 2020). Assuming the PKR remains stable and the ongoing supply issues are resolved, we believe margins will improve further due to higher utilization levels. The influx of new entrants such as Changan, Kia and Hyundai, however, can test the rise in sales and margins, in our view.