Indus Motors: Fortune favours the bold

Exactly one year ago in August, Indus Motors (PSX: INDU) had reduced prices for all locally assembled models in the country—a move almost unheard of—due to an uptick in PKR against the dollar. The average price for Toyota cars were marked down by 7 percent. Only three months later, the company started raising prices again citing rupee depreciation. Nobody can deny the rupee has depreciated over the past year—about 40 percent to be exact but Toyota cars have become much more expensive—car prices are up between 51 percent and 58 percent compared to June of this year and last. This was necessary; it seems, for the company to maintain profitability of about Rs9.6 billion, down 39 percent from last year, after paying a steep tax of 42 percent. Yet the company audaciously decides to issue a dividend payout of 58 percent to its shareholders.

This is higher than last year’s 47 percent, even though earnings took a downward tumble this year. But whilst signalling confidence to investors that the company is doing well enough—better even than last year—Indus Motors continued to retain some cash for the rainy day. The average 10-year dividend payout for Indus Motors comes around to 62 percent, so the outgoing year’s bold payout is still congruent with the company’s average pattern, just.

What really jumps out is the closing gap between revenue and costs per unit sold. Even though the company has raised prices higher than the rupee depreciated during the year, it still apparently has been insufficient. Revenue per unit sold for the assembler rose 55 percent in FY23, compared to a 58 percent hike in costs per unit sold. Hiking costs indicate future price hikes may still be on the cards. Indus Motors runs a tight ship with overheads and non-operating expenses constituting of barely 2 percent of revenue while finance costs remain negligible.

With supply restrictions easing, it will be interesting to watch demand dynamics come into play. For one, the market would have a better understanding of where demand for Toyota cars stands. In FY23, volumes slid 58 percent, but how much of that was due to demand dying out or supply lines drying up is the question of the day. Car financing rates are prohibitively high and rising; banking risk appetite for car loans is likely suppressed while tougher regulations imposed by SBP would further make bank financing inaccessible. This leaves car buyers purchasing cars on cash.

And there might be plenty of those still in the market. Indus Motor’s “other income” in FY23 rose 10 percent indicating increased advances, though in the last quarter, other income did not grow as much as it did during the first 9 months. Even so, this buttressed the years bottom-line by a whopping 84 percent, allowing gross margins of 4 percent to transform into 5 percent net profit margins.