Karachi, July 07, 2022 (PPI-OT): Autos: Super tax to suppress earnings during 4QFY22

We present our earnings estimates for Jun-2022 quarter for the Auto sector, where the retrospective impact of Super Tax is expected to more than offset the impact of multiple price hikes announced by the auto makers coupled with healthy volumes. As a result, earnings for INDU/PSMC/HCAR are anticipated to decline by 21%/51%/64% YoY, respectively.

However, margins are estimated to remain relatively stable over the impact of recent price hikes which are to be reflected in the Jun-2022 quarter.

Sales volume has been impressive during the quarter, however, we foresee a declining trend in the coming quarters as the impact of 1) cost led price hikes, 2) higher interest rates and 3) measures taken by the regulatory authorities, weighs in.

Strong quarter performance eroded by super tax

We present our earnings estimates for Jun-2022 quarter where we foresee the improvement in the auto sector’s performance amid healthy volumes, improved margins and support from other income being eroded away by the imposition of super tax announced by the GoP.

Pak Suzuki Motor Company (PSMC)

Closing the fiscal year with its highest ever monthly sales during Jun-2022, the company is anticipated to witness an improvement in its core income. Net sales of the company are poised to grow by 40% owing to higher sales volume amid aggressive pre buying and the recent launch of swift coupled with higher car prices. To counter the impact of rising production costs amid PKR devaluation and rising freight rates, the company jacked up its prices twice during the quarter first in Apr-2022 by 8-10% followed by a further hike of 3-4% in May-2022 which we expect will support the company’s margins close to the 4.5% level.

However, given the imposition of Super Tax (10% on CY21 earnings and 4% on 1HCY22 earnings) in 2QCY22, our earnings limit to Rs2.51/share, albeit higher than an LPS of Rs5.59 posted during the previous quarter, taking 1HCY22E LPS to Rs3.08.

Indus Motor Company (INDU)

INDU is expected to post an EPS of Rs44.60 for Jun-2022 quarter as compared to Rs65.11 during previous quarter, taking cumulative EPS for FY22 to Rs239.16 up by 47% YoY. This includes the Super Tax impact in 4QFY22 where the company may charge an additional 10% tax on its FY22 PBT.

Despite lower sales volume by 3% QoQ, net sales of the company are set to grow by 14% QoQ owing to multiple price increases during the quarter and a shift in sales mix towards the higher priced Hilux.

However, gross margins are likely to witness some improvement and are anticipated to clock in at 8.1% as against 7.7% during the Mar-2022 quarter. To offset the impact of rising production costs, the company undertook two more rounds of price hikes during the quarter increasing prices by 10-11% in Mar-2022 and 4-5% in Apr-2022.

Moreover, with a sizeable cash and STI balance of Rs131bn as of Mar-2022 accounts, INDU’s earnings are expected to gain further support by growth in its other income amid high customer advances and rising interest rates.

Honda Atlas Cars (HCAR)

HCAR is expected to post an EPS of Rs 2.37 for Jun-2022 quarter as compared to Rs1.38 during previous quarter. Net sales of the company are expected to contract by 3% QoQ owing to lower sales volume as demand for the recently launched Civic starts to normalize. Gross margins on the other hand are expected to improve owing to the multiple price hikes announced by the company during the quarter similar to its peers.

Earnings during previous quarter remained suppressed owing to higher effective tax rate booked by the company (76%) which is expected to remain elevated during this quarter as well owing to the imposition of super tax. The tax is expected to have a negative EPS impact of Rs3.31 translating into an effective tax rate of 70%.

Outlook

Despite impressive sales volume during the quarter, we foresee a declining trend in the coming quarters as the impact of 1) cost led price hikes, 2) higher interest rates and 3) measures taken by the regulatory authorities, takes its toll on demand. Demand for the sector is anticipated to shrink by 25% during FY23 due to the above-mentioned factors which is also evident from the fact that most auto companies (INDU, PSMC, KIA) have closed advance bookings citing unbearable production costs as the main reason. Although margins are anticipated to show improvement during the quarter owing to multiple price hikes, moving forward, in the coming quarters the same are anticipated to face additional pressure once volumes start deteriorating.