INDU: Hanging on

Another PSX announcement informing two more days of plant closures will make it Indus Motors’ (PSX: INDU) third plant closure this year. Restricted supply of raw materials and components owing to the ongoing LC crisis has made it difficult for automotive assemblers to keep plants running. In the nine-months to the fiscal year, the company’s volumes shrank 56 percent leading to a 34 percent drop in revenue and a bigger drop—62 percent—in earnings. Though, its net margins are still higher than the gross margins; which also demonstrated improvement in the third quarter considering the first two quarters, the company was operating on negative gross margins.

Much higher prices contributed to the slight uptick in third-quarter margins compared to previous quarters—revenue per unit sold rose 77 percent in 9MFY23 year on year. The company’s bold dividend payout—of 58 percent—seems to signal a level of confidence that belies ground realities—the odds being stacked against the company given challenges from both supply and demand sides. The average payout ratio for the past 10 years (during the 9M period) is 52 percent. On the supply side, there is no easy way to revive imports without solving the larger economic problem looming over the country. Meanwhile, on the demand side, prohibitively high cost of borrowing to purchase pricier and pricier cars yet has started to faze new car buyers. The problem is also overall inflation, especially amongst goods such as petrol and fuel. Buyers are looking for more fuel-efficient vehicles that may be smaller but may give them a better fuel average. Volumes across the board have plummeted.

The company runs a tight ship spending only about 2 percent of revenue on overheads and other expenses, and negligible sums on finance costs (0.1% of revenue), but the very squeezed gross profits owing to massive cost inflation and rupee depreciation did the job. It was once again “other income” that came to the auto assembler’s rescue, buttressing the bottom-line significantly. In 9MFY23, other income indicating cash advances was 1.5 times what it was in the same period last year. The resulting profits of Rs5.8 billion are still a reasonable chunk of money, though not by Indus Motors standards.

What’s happening in Pakistan is no garden variety crisis though, a country not unfamiliar with such predicaments in the past. It is evident that without a substantial shift and improvement in the macroeconomics of the country, manufacturers like Indus Motors heavily dependent on imports will watch their suffering only grow.