Earnings Report /
Pakistan

Indus Motors: Q4 FY 20 review – Earnings miss on negative gross margins; downgrade to Neutral

  • The lockdown in 4Q dragged INDU into operating losses for the first time in 10 years

  • Despite average 5% price hike in April, GMs could not overcome the impact of lost sales. GMs down c.15ppt qoq

  • We downgrade our stance from Buy to Neutral (TP PKR1,273/sh) due to c.37% rally since May (FY21f P/E 18.3x)

Intermarket Securities
10 August 2020

Indus Motors (INDU) reported 4QFY20 NPAT of PKR98mn (EPS: PKR1.25) down 97% yoy and 96% qoq, much lower than our EPS expectation of PKR7.57. This was led by a surprising negative gross loss. This takes FY20 earnings to PKR5.0bn (EPS: PKR64.66), down a sharp 63% yoy. The company also announced a final interim dividend of PKR7.0/sh, higher than our expected DPS of PKR2.0/sh, taking FY20 DPS to PKR30/sh.

4QFY20 Review highlights include:

  • INDU depicted a sharp 69% qoq decline in sales to PKR10.3bn, (lower by 74%yoy), slightly higher than our expectations, where deviation may be due to higher sales in the trading segment. The sequential decline in revenues was led by a sharp 72% qoq fall in volumes to 3,078 units vs. 11,125 units in 3QFY20, largely attributed to the Covid-19 lockdowns resulting in poor sales during April (nil) and May.

  • Gross margins declined by 15ppt qoq to -3%, much lower than our expected GMs of 7%. This may be due to an increase in overheads per unit, as the plant was shut down for 50-60 days during the quarter, despite a price hike (average increase of 5%) in April.

  • Distribution expenses have declined 38% yoy (down 53% qoq), which may be attributed to the depressed sales during the quarter. Admin expenses decreased by 20% yoy, while flattish (up 3%) on a quarterly basis.

  • Other income saw a 22% qoq and 25% yoy decrease to PKR868mn. This is potentially due to net cash consumption during the lockdown and decline in PIB yields, in our view. INDU had an effective tax rate of 47%, compared to 31% in the last quarter, which implies imposition of turnover tax.

The lockdowns (from late March) inflicted unprecedented loss of sales on the auto industry, which recorded a historic low of nil sales in April and negligible sales in May (lockdowns eased by mid-May). That said, we expect sales and margins to rebound in the coming quarters as economic activity picks up – similar to the momentum observed in June 2020 sales (c. 2,500 unit sales, up 363% mom). Rise in auto financing – following recent 625bps decline in interest rates – can act as an additional trigger.  We downgrade our stance on INDU from Buy to Neutral on INDU with a TP of PKR1,273/sh, given the c.37% rally since May. The stock is trading at a FY21f P/E of 18.3x.