Karachi, April 10, 2023 (PPI-OT): INDU: The calm in the choppy sea

As can be seen in recent quarters, the company’s profitability is largely being driven by non-operational factors, mainly Other Income generated on Short-Term investments. INDU’s profitability in 2QFY23 was aided by improvement in gross loss from -6.3% in 1QFY23 to -1.0% in 2QFY23, which can be attributed to the impact of increased prices during the period, albeit still standing in negative territory.

The recent hikes are expected to start having the desired effect starting 3QFY23, wherein we expect the company to post gross margins of 2.41%. On a longer-term horizon, INDU’s gross margins are expected to average ~5% between FY24 and FY28, compared to 10% averaged in the past 5 years.

The company’s ST investments and cash cumulatively stood at ~PkR66bn as at Dec’22, or PkR839.7/sh, corresponding to 94% of the stock’s last closing price. This strong liquidity position has shielded the company’s bottom line in the recent past, with the auto manufacturer being able to post net profits despite gross losses in the recent two quarters.

The stock is currently trading at ~6.75 times its FY24 earnings, compared to a P/E of 6.44x averaged over the past 6 years. We have a “Hold” stance on the stock with a Dec’23 Target Price of PkR1,077/sh, which offers a potential total return of 26.3% from the last close including a 5.5% dividend yield.