Karachi, September 06, 2023 (PPI-OT): INDU: Management foresees challenges to persist

Indus Motor Company Limited (INDU) held its Analyst Briefing yesterday to discuss its FY23 financial performance and outlook. To recall, INDU posted an EPS of Rs122.96 for 2QFY23, a 39% decline YoY mainly owing to 58% YoY lower volumetric sales.

Management plans to devise new strategies including improvement in sales mix and reducing operational expenses aimed at improving the company's financial position. Following a steep decline in FY23, management foresees sales to further shrink 8% this year.

We maintain our 'Sell' stance on the stock where we foresee ongoing demand issues coupled with suppressed margins to keep sector profits in check in the near term.

FY23: Lower volumes lead to a decline in EPS

Indus Motor Company Limited held its Analyst Briefing yesterday to discuss its FY23 financial performance and outlook. To recall, INDU posted an EPS of Rs122.96 for FY23, a 39% decline YoY. Decline in turnover and profitability for the year was mainly due to 58% lower volumetric sales on account of import restrictions and demand contraction. Gross margins dropped by 2.2ppt YoY to 4.5% during FY23, primarily attributed to rising input costs driven by a significant devaluation of the Rupee. Margins, however, showed sequential improvement in 4QFY23, mainly due to improved sales mix and realization of revised prices along with reduction in overheads. A DPS of Rs29 was announced with the final result taking total dividend for FY23 to Rs71.8/share.

Sluggish demand scenario continues

Marred by demand and supply issues, industry volumes dropped by 55% during FY23. Out of the three old listed auto players, PSMC grabbed the largest chunk of sales (52%) followed by INDU (25%) whereas HCAR lagged behind with a 13.5% share. Administrative controls by SBP limiting establishment of LCs for imports of CKD kits have been the major source of supply side disruption.

Leaving supply side issues aside, demand also remains dull with multiple rounds of price hikes by automakers deterring customers from purchasing vehicles in addition to record high interest rates. Management foresees market to remain dull with sales clocking in the 28-30k units range (decline of ~8% YoY during FY24).

Despite these challenges, the management shares that INDU continues to actively devise new strategies to weather the storm. These strategies include improving sales mix, reducing operational costs, and generating positive cash flows to enhance overall financial performance.

Outlook remains cloudy

Unprecedented rupee depreciation and increase in taxes has led to multiple rounds of price hikes since Jan-23. Impact of these measures coupled with high inflation and rising interest rates are eroding consumers' purchasing power, negatively impacting automotive sector's sales.

We maintain our ‘Sell’ stance on the stock where we foresee ongoing supply and demand issues coupled with suppressed margins and weakening cash position to keep sector profits in check. Any drastic reduction in duties and taxes for the auto sector and / or quicker turnaround on the macro level, remain key upsides to our thesis.