Karachi, April 19, 2023 (PPI-OT): INDU and ISL - 3QFY23 Result Previews

INDU -3QFY23 profits to clock in at PkR21.72/sh: We expect Indus Motors Company Limited (INDU) to post earnings of PkR1.71bn (EPS: PkR21.72) in 3QFY23, increasing by 28%QoQ while decreasing by 67%YoY compared to PAT of PkR1.33bn (EPS: PkR16.93) in the last quarter. This will take 9MFY23 earnings to PkR4.34bn (EPS: PkR55.15) dropping drastically compared to earnings of PkR15.3bn (EPS: PkR194.57) in 9MFY22. We expect the revenue for the quarter to clock in at ~PkR46bn down by 7%QoQ on the back of higher effective prices during the period which are likely to outweigh lower volumetric offtakes, down by 11%QoQ to clock in at 3,356 units.

Furthermore, gross margins are likely to recover and clock in at 2.4% in 3QFY23 following a gross level loss reported in the last quarter to the tune of 1% of net sales. The recent price hikes are expected to start having the desired effect starting from 3QFY23 onwards. Moreover, other income is expected reap benefits, to clock in at PkR2.4bn (PkR 30.51/sh) although down by 31%/25% QoQ/YoY owning to decline in ST investments outweighing the rise in interest rates.

ISL - Earnings to clock in at PkR1.94/sh in 3QFY23: ISL is expected to announce its 3QFY23 result today, wherein we expect the company to post a profit of PkR845mn (EPS: PkR1.94) vs LAT of PkR388mn (LPS: PkR-0.9) in the quarter before, changing by +318%/-25% on QoQ/YoY basis. The steep YoY decline in earnings majorly emanates from falling flat steel margins, which averaged at US$60/ton during the outgoing quarter vs. US$85/ton SPLY.

Furthermore, falling volumetric output on the back of depressed production in the 2/3 wheelers (down 34%YoY) and white goods sectors alongside declining LSM activity (down 5.5% in 8MFY23) has adversely impacted the business activity in the steel sector overall. For this reason, we have assumed total offtakes of CRC/Galvanized to stand at 78k during the quarter, down ~11% (vs. 88k last quarter). However, the sharp increases in retail prices for flat products during the previous three months are expected to provide impetus to the quarters gross profitability, with ex-mill prices averaging at PkR235k/ton (up ~15%QoQ).

Furthermore, rising conversion costs (electricity/direct costs) and multi-decade high interest rates have further exacerbated the situation, for this reason we expect GP/NP margins to clock in at 10.7%/1.7% during 9MFY23 vs. 13.5%/7.6% SPLY. With raw material (HRC/scrap etc.) hard to come by amidst import restrictions by the SBP in the near term, we have a ‘NEUTRAL’ stance on the stock due to the cyclical nature of the business and the prevalent economic situation in the country. The company currently trades at FY24 P/E of ~3x while our TP of PkR45/sh provides a negligible upside of ~7% from the last close.