Earnings Report /

Sep’22 Result Preview - Administrative measures will push massive earnings drop

  • We expect IMS Auto Universe combined NPAT to plunge a sharp 73% YoY to PKR2.0bn, owing to import curtailment on CKD’s

  • The Sep’22 quarter was marred by plant shutdowns, which is likely to further dampen gross margins, in our view

  • We remain Marketweight on the Automobile sector with a preference for INDU

Intermarket Securities
17 October 2022
  • For Sep’22 results, we expect IMS Auto Universe combined net profit to plunge a sharp 73% YoY to PKR2.0bn, largely owing to administrative measures imposed by the SBP to curb CKD kit imports. Lower gross margins will also contribute to this decline.

  • The Sep’22 quarter was marred by plant shutdowns, which resulted in a 53% decline in sales compared to last year (sales down 52% QoQ). Although commodity prices continued to slump, implying positives for input pricing, lower volumes are likely to further dampen margins, in our view.  

  • The ongoing Dec’22 quarter is expected to exhibit a similar trend in volumes and profitability. That said, while improvement may take time to come through, sector fundamentals may arguably already have bottomed out.

Plant shutdowns will continue the downtrend in earnings

Auto industry sales slumped by a sharp 53% YoY to c.31,000 units in the Sep’22 quarter, largely led by the sporadic plant shutdowns of both Pak Suzuki Motors (PSMC) and Indus Motors (INDU). The restricted import quotas (50% of the required imports) imposed by the Central Bank, were the critical factor behind the significant decline in both sales and production. According to our channel checks, the OEMs are still operating on a single shift basis. We expect industry revenue to clock in at c.PRK94bn, (down 34%/44% YoY/QoQ). This is expected to translate into a 73%/25% YoY/QoQ decline in Autos NPAT to PKR2.0bn, owing to i) significantly lower sales and ii) lower gross margins (industry gross margin estimated to clock in at 2.9%).

Lower fixed cost absorption to result in margin attrition

We expect the IMS Autos Universe margins to decline by a sharp 5.2ppt/0.5ppt YoY/QoQ, amid significantly lower production resulting in lower fixed cost absorption. The sequentially modest decline in gross margins is due to i) further realization of price hikes in September quarter, and ii) receding commodity and freight cost pressures. However, the PKR depreciation against the USD during the quarter, and potential demurrage charges on containers, pose additional risks to our estimated margins. Looking ahead, long delivery lead times (at least 4months), will likely continue to prevail owing to long approval queues of LCs for part imports. This, coupled with closure of car bookings (since May’22) and monetary measures to restrict demand, will likely extend the sales attrition in the ongoing year.

Tractors: Earnings to falter amid lower margins and sales

The IMS Tractor Universe is expected to post a combined NPAT of PKR1.3bn in the Jul-Sep’22 quarter, depicting a massive 43%/24 YoY/QoQ decline. This is largely due to i) a 30% YoY slump in sales to c.8,400 units and ii) lower gross margins. Going forward, lower tractor offtake owing to delivery issues emanating from the recent floods and slow reimbursement of government refunds, is likely to result in lower industry sales in the ongoing quarter (Dec’22), in our view.  

Continue to remain Marketweight on the sector

We expect a similar trend in volumetric sales and profitability in the ongoing quarter Oct-Dec’22 quarter, in the absence of any easing on import curbs. Although improvement may take time, industry fundamentals may already be priced in. The sector has underperformed the broad market index by c.23ppt since May’22. We, therefore, remain Marketweight on the Automobile sector with a preference of INDU as our top pick.