INDU: The more things change

Nothing, least of all a mega economic crisis, seems to really faze a company like Indus Motors (PSX: INDU). The Toyota assembler in Pakistan recorded a negative gross margin in both the first two quarters of the fiscal year (1Q: -6%, 2Q: -1%) but still managed to turn a positive net margin in the first half of the fiscal year—at 3%; earning close to Rs3 billion in after-tax earnings. Historically, that is not a lot for Indus Motors, but given that volumes have plunged 52 percent during the period, year on year, and the company has kept plants un-operational for many of the working days, turning over positive earnings is nothing short of fantastic for shareholders.

Cars have become extremely expensive over the past year—illustratively, revenue per unit sold for INDU rose 34 percent—but that still may not have deterred car buyers from heading over the dealerships. The drop in volumes may have come potentially from lower foot traffic of prospective car buyers, but mostly, it is the supply side hurdles that have suffocated demand. First import quotas were levied on assemblers and later the entirely supply chain stopped short as the country ran out of dollars to pay for imports. Thousands of items are still stuck at the port waiting to be cleared. This necessitated players like Indus Motors to shut down shop for days at end. However, higher prices allowed revenues to not drop by as much as volumes.

Costs are another story. Rupee depreciation and overall inflation took costs per unit sold up 52 percent. Hence, margins were shoved down into the negative zone from 9 percent in the first half of last year. However, the company does not have a large loan book—finance costs are negligible—while overheads and other charges have remained consistently low at 2 percent of revenue. This is not out of the ordinary historically either. Meanwhile, the company’s “other income” was sensational during the period—buttressing the bottom-line by 2.3 times i.e. other income was more than double of before-tax earnings. Other income comes from the company’s short-term investments and cash advances put into the bank which earn a rate of return pegged to the interest rates—which are prevailing high. In rupee terms, other income grew 89 percent in 1HFY23 compared to last year. This supported final earnings significantly for Indus Motors.

The company’s dividend payout thus far in 1HFY23 stands at 55 percent which is close to the average half year payout ratio over the past 10 periods at 57 percent. Right now, the company is signaling confidence and does not intend on laying off any employees. However, if this situation persists, even if Indus Motors does not fire its own employees, low volumes will hurt parts manufacturers—particularly smaller ones.The company is suffering from an inventory shortage which may push for a prolonged plant shut down which will hurt component and parts makers while it has raised prices for the third time in a month which could potentially turn off those cash buyers that are still willing and able. Having said that, one cannot underestimate the buying power of the rich, especially when Toyota cars are popularly known as an investment purchase—many believing luxury cars are a good place to park money. All of that will come into play however, when supply restrictions ease. Indus Motors should hope to avoid too much damage to the dynamics of the industry until such a time.