Indus Motors expects economic recovery and as a result the demand for its cars to recover slowly, predicting volumes to remain subdued till FY25. Makes sense; in 1HFY24, the company’s cumulative volumes have slid 61 percent. But there aren’t many losers in this situation, least of all the company and its shareholders. Perhaps, like always, the “consumer” and the “car buyer” is the only group missing out.
At 60 percent payout during the first half when volumes are half of what they were last year; shareholders better be happy. The average payout ratio since the first half of FY09 till date is roughly 55 percent, which means current payout is higher. There are multiple reasons for this confidence signalling. While the company’s revenues reduced 41 percent, the company was able to keep control of costs and was able to sell a mix of products that optimized its revenues. To gauge that, we calculated the revenue and costs for every unit sold by the company for the half year since 2009. In 1HFY24, revenue per unit sold which is essentially the average price at which an Indus Motor car was sold stood at Rs7 million while its cost of production was Rs6.4 million. The revenue per unit sold is up 49 percent, while the costs are up by lower, 31 percent. This allowed margins to improve from -3 percent to 9 percent. But even healthier are the net margins, even though overheads are up.
The company’s overheads which include administrative and marketing expenses have increased from 2 percent to 4 percent of revenue which may have resulted from salary and wage increases, and pension and provident funds. If Indus Motors is raising salaries and wages in accordance with or excess of prevailing inflation; employees better be happy. If not, the company should be doing that given that it is still making decent earnings. For reference, in 1HFY24, profits after tax rose 89 percent. At Rs4.96 billion, that is significant. Before tax, these earnings stood at Rs7.4 billion, up 96 percent from 1HFY23. Taxes paid by the company during the period—33 percent of earnings—were Rs2.4 billion. Government better be happy?
But despite the overheads and tax increases, net margins are for the first time even higher than gross margins. At 10 percent in 1HFY24, net margins are impressively up from 3 percent last year. Why? Partly because the company started strong with 9 percent gross margins and then buttressed the bottom-line with significant “other income” coming from cash and advances. As a share of revenue, other income stood at 10 percent while as a share of pre-tax earnings, its 72 percent. This means, majority of final earnings are coming from other income—this is not uncommon for a company like Indus Motors. Since FY22, other income has nearly taken over (see graph) contributing to much of the profit the company ends up making.
According to the company, taxes paid in the value of a typical Indus Motor car is nearly 50 percent. Though unverified, this is steep; and government better be twice as happy, right? The loser here is the consumer that ends up paying a lot more than the cars are actually worth because taxes are so high. But let’s not forget that greater volumes would have yielded a greater tax collection for the government—what needs to be calculated is the impact on volumes if taxes are reduced by a certain percentage, considering that the reduction of taxes will be passed on the consumer through a price drop. Time will tell how wise it was for the government to raise sales tax on cars to 25 percent—whether the government collects more tax revenues than before would depend on the impact of this move on volumes.
Ultimately, this really leaves car buyers in a lurch. There is a group of buyers that can afford pricey cars on cash (car financing through banks is now more difficult by design) and are still buying. This is a small group—in 1HFY24, about 7000 vehicles were sold by the company. But new demand has not completely disappeared. As told by the management, the newly launched Corolla Cross has exceeded the company’s expectations in terms of order intake where monthly order run is as much as 1000 units. Meanwhile, those who don’t fall in the restricted category of car buyers described above, will just have to move on to other variants and segments (lower engine size perhaps?), other companies (Chinese perhaps?) or other markets altogether (used cars, second- hand cars etc.). Not much optimism is coming that way.
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