Karachi, March 10, 2023 (PPI-OT): INDU: Management eyes sector to shrink to one third this year

Indus Motor Company Limited (INDU) held its Analyst Briefing yesterday to discuss its 1HFY23 financial performance and outlook. To recall, INDU posted an EPS of Rs16.93 for 2QFY23, stable QoQ as net sales growth outweighed impact of negative gross margins and lower other income.

Order intake has been closed for the past two months while plant operations remained suspended for 14 days during Feb-23 as well. Accordingly, management foresees the market to shrink to one third on its size from last year (decline of 66% YoY during FY23).

We maintain our ‘Sell’ stance on the sector where we foresee ongoing supply and demand issues coupled with suppressed margins and weakening cash position margins to keep sector profits in check.

2QFY23: Higher prices and volumes keep EPS stable QoQ

Indus Motor Company Limited (INDU) held its Analyst Briefing yesterday to discuss its 1HFY23 financial performance and outlook. To recall, INDU posted an EPS of Rs16.93 for 2QFY23, stable QoQ as net sales growth outweighed impact of negative gross margins and lower other income. Cumulatively, EPS for 1HFY23 now stands at Rs33.43, down 74% YoY with a DPS of Rs18.40 announced during the same period so far.

CKD quotas restricted to 25-30% under new mechanism

Marred by demand and supply issues, industry volumes dropped by 45% during 1HFY23 with PSMC grabbing the largest chunk of sales (46%) followed by INDU (18%), HCAR (11%), Hyundai (4%) while other assemblers including KIA grabbed a market share of 21%. Administrative controls by SBP limiting establishment of LCs for imports of CKD kits have been the major source of supply side disruptions. Initially, SBP through July-22 to Dec-22 had allowed automakers to import under 50% quotas calculated as average of last 4 month imports. The quota limit was supposed to be increased gradually, however, in a turn of events, the SBP from Jan-23 onwards replaced the quota mechanism with a new one under which banks were given the authority to open LCs as per a priority list with import of essentials as top priority and no mention of autos. Consequently, CKD imports in quota terms is down to 25-30% from 50% earlier.

Leaving supply side issues aside, demand is at a standstill as well with multiple rounds of price hikes by automakers deterring customers from purchasing vehicles in addition to record high interest rates. Order intake has been closed for the past two months now while plant operations remained suspended for 14 days during Feb-23 as well. Management foresees the market to shrink to one third on its size from last year (decline of 66% YoY during FY23).

Liquidity position deteriorates

Liquidity position of the company has been rapidly deteriorating as well with lower advances from customer as bookings dry up while amounts held against opening of LCs continue to swell. For perspective, advances from customers have decline from Rs112bn in Jun-22 to Rs47bn in Dec-22 resulting in a simultaneous decline in cash and short-term investments from Rs148bn to Rs66bn during the same period. Loans and advances primarily consisting of cash held with banks for opening of LCs has expanded from Rs9bn in Jun-22 to Rs32bn as of Dec-22. With the mentioned changes, we expect support from other income to subside in the coming quarters.

Outlook remains uncertain; targeting breakeven for 3QFY23

INDU has struggled to keep its gross margins in positive territory for two consecutive quarters owing to volatile currency situation, compensation paid to customers on late deliveries and declining volumes. Management is targeting breakeven for 3QFY23 before raising hopes of any sort of bounce back as new prices come into full effect. To recall, in light of unprecedented PKR devaluation post the move from fixed exchange rate to free floating exchange rate and increase in GST from 17% to 18%, the company has undertaken 4 rounds of price hikes since Jan-23. Now, with the recent increase in GST from 18% to 25% for 1400c+ vehicles, another hike in prices remains inevitable taking additional toll on demand for its line-up.

We maintain our ‘Sell’ stance on the sector where we foresee ongoing supply and demand issues coupled with suppressed margins and weakening cash position to keep sector profits in check. Any drastic resolution of raw material shortage or turnaround on the macro level, however, remains key upsides to our thesis.