Earnings Report /
Pakistan

Pakistan Autos: Surge in sales to lift profitability in 3Q results

  • We estimate the IMS Autos Universe to post a combined NPAT of PKR5.5bn in 3QFY21, amid sharp 27% qoq rise in volumes

  • PSMC is expected to post NPAT for the second consecutive quarter, on the back of strong sales volumes (c28,000 units)

  • We are Overweight on the sector, while preferring INDU (TP of PKR1,458/sh) and PSMC (TP of PKR450/sh) as our top picks

Abdul Ghani Mianoor
Intermarket Securities
14 April 2021

For January-March 2021 results, we expect our Auto Universe to post combined net profits of PKR5.5bn, up 17% qoq, amid sharp 27% qoq growth in volumetric sales and improved gross margins.

PSMC, however, outperformed both INDU and HCAR, with a c.37% qoq growth in sales due to the uptick in demand for the Economy segment, led by Alto. The surge in overall volumes and a c.5% qoq PKR/US$ appreciation will lead to improvements in margins as well, in our view.   

The expected strong results reinforce our Overweight stance on the sector, which has declined c.4.5% CY21td, leading to attractive valuations. Our top picks are INDU (Buy, TP of PKR1,458/sh) and PSMC (Buy, TP of PKR450/sh).

Momentum in profitability to continue in 3Q

For the first time in seven quarters, Pak Suzuki Motors (PSMC) achieved sales of over 25,000 units, clocking in at 28,077 units in 1QCY21. We therefore estimate PSMC to post a net profit for the second consecutive quarter, amounting to PKR1.1bn (EPS: PKR13.34/sh), up 9% qoq. Gross margins are expected to soften qoq to 7% from 8.2% (one-offs in 4QCY20, but up 2ppt compared with 3QCY20). The increase in prices of various models (Cultus, Swift, Wagon R and Alto) at the beginning of the quarter is expected to improve margins, coupled with the smoothening out of global supply-chain disruptions (related to parts), in our view.

For Honda Atlas (HCAR), we expect earnings to jump a sharp 28% qoq, largely stemming from the 25% qoq upswing in combined sales of the City and Civic, despite growing competition for both the sedans. We believe that the rise in volumes (especially from the BRV, up 55% qoq) and appreciation of the PKR will lift margins to 7.1% from 6.5% last quarter, resulting in a NPAT of PKR961mn (EPS: PKR6.73).  We highlight that the New City launch (expected 1HMY22) is a key catalyst for stock price.

Indus Motors (INDU) is expected to post an NPAT of PKR3.4bn (EPS: PKR43.81), attributed to overall increase in sales amid smoothening of supply disruptions, in our view. Recall that INDU posted the highest monthly production since 1993 (in March). We expect GMs to rise on the back of higher production (lower per unit overheads). Other income is expected to remain healthy (above the PKR1bn level), with the sharp rise in orders, leading to greater cash balances. We highlight that lead times are now 3-4mths for INDU.

Tractor volumes were up by c.40% qoq to 15,190 units. Millat Tractors (MTL) saw a decent 25% qoq rise in sales, while that of Al-Ghazi Tractors (AGTL) rose a staggering c.75% qoq (albeit from a low base), to 4,801 units. We expect profits for the two Tractor companies to post double-digit qoq growth.

Industry sales are likely to sustain current levels

According to channel checks, the OEMs have strong order backlogs at present, where we expect present volume growth to be sustained for the remainder of 2021. Assuming the PKR remains stable and global commodity prices moderate, we believe margins will improve further due to higher utilisation levels. However, (i) the emerging global semiconductor shortage may test the sector’s ability to push deliveries in the near term and, (ii) the increase in competition from new entrants such as the Proton Saga and Hyundai Elantra, among others may keep a check on sales growth, in our view.