Karachi, October 25, 2022 (PPI-OT): Autos: Production bottlenecks to restrict profits in 1QFY23

We present earnings preview for the three listed auto assemblers for Sept-2022 quarter, where we expect profit before taxes to decline significantly on a sequential basis.

Despite higher auto prices, the expected lower profits before taxes are a result of 54% QoQ lower volumes owing to existing demand concerns compounded by supply chain issues. To recall, plants of two out of the three companies remained closed for almost half of 1QFY23, though in intervals.

Going forward, subdued demand for cars, coupled with production issues caused by limited quota for CKD kits import, is expected to contract FY23 volumes by 50% YoY.

Profits to suffer as volumes decline 54% QoQ

We present earnings preview for the Auto sector (Sept-2022 quarter), where we expect profit before taxes to decline significantly on a QoQ basis as combined volumes for the three companies washed away by 54% QoQ owing to existing demand concerns compounded by supply chain issues. The decline is expected despite healthy cash balances and minimal debt lifting other income in the ongoing higher interest rate scenario.

Bottom-line, however, is expected to receive some support from absence of one-time 10% Super tax charged in Jun-2022 quarter, albeit, insufficient to report any positive growth, barring Indus Motors (INDU).

PSMC: Lower volumes and minimal margins in 3QCY22E

With 59% QoQ decline in sales volume to 17k units, we foresee 3QCY22 EPS of Pak Suzuki Motors (PSMC) to decline 67% QoQ to Rs1.78. The decline comes despite aggressive price hikes and absence of one-time super tax imposed during previous quarter. Net sales are expected to slash to Rs31bn, down 52%, whereas margins are expected to decline to 2.2% as against 4.4% during the previous quarter as a result of lower volumes and higher cost of production. The company’s plant remained shut for almost half of Aug-2022 and Sept-2022. Nonetheless, support from other income is expected to remain stable amid rising interest rates and healthy cash balances.

INDU: 1QFY23E gross margins to report close to breakeven

INDU is expected to post an EPS of Rs31.91 for 1QFY23 as compared to Rs6.48 during previous quarter.
Net sales are expected to be driven down to Rs39bn, down 46% QoQ, despite higher prices due to decline in sales volume by 51% QoQ. Margins, on the other hand are expected to hover close to breakeven at the gross level at 1%, amid unbearable production costs.

While the aforementioned factors are expected to turn operating profits into losses, support from other income and absence of one-time super tax are expected to boost bottom-line growth.

HCAR: Bottom-line likely to turn red this quarter

Honda Atlas Cars (HCAR) is expected to post an LPS of Rs3.45 for Sept-2022 quarter as compared to an EPS of Rs4.61 during previous quarter. Losses are expected as a result of lower volumes and steep contraction in margins. Company’s sales are expected to contract by 34% QoQ with 40% QoQ lower sales volume. Similarly, gross margins are expected to decline to 2% from 6% during previous quarter, despite multiple price hikes as the company attempted to offset the impact of rising costs related to currency depreciation.

As the company dives into losses on the PBT level, we apply minimum turnover tax for this quarter. Albeit, total taxes are expected to decline 42% QoQ due to higher tax base in the previous quarter.

Near term margins to feel pressure over subdued volumes

With subdued demand for cars in the market coupled with production issues caused by limited quota for CKD kits import, we foresee demand for autos to witness a drop of up to 50% during FY23. We anticipate issues related to CKD imports to linger on into the next quarter as well before incorporating relaxation of CKD import quota from 50% to 70% as the government gains a relatively better grip on CAD.

As a result of depressed volumes and escalating cost of production we expect gross margins to remain under pressure in the near term as well. Similarly, support from other income is expected to diminish, as advances from customers dry up with declining order intakes.