Arguably the most popular car brand in the country, Indus Motors (PSX: INDU) announced its financial results for the fiscal year with a 25 percent growth in the top-line, a subsequent 21 percent growth in its after-tax profits with a slight dip in margins. The earnings have been above expectation of most brokerage houses. A number of factors have led to these dynamics.
Auto manufacturers and auto parts vendors were directly hit by the rise in steel price that were up surging cost of production. This factor together with rupee depreciation needed to be tackled—between January and June, the company raised prices for cars across variants between 8- 13 percent. This allowed keeping revenues stable. This was further bolstered by an average volumetric growth of 5 percent with a good sales mix. Fortuner now occupies 7 percent share in the mix (FY17: 2%) while Hilux is at 12 percent (FY17: 10%). In fact, Fortuner sales tripled during the period and Hilux with the new model has also shown strong appetite in the market.
Corolla sales have been somber over the past two years even though the company has been working on improving efficiency and reducing delivery times by working overtime. It is clear that demand is growing at a much faster pace for the company’s flagship. Production fell by 1 percent and 2 percent in the first and second quarters of the fiscal year. To counter this, the company is investing Rs3.3 billion to enhance production to 76,000 which will materialize by FY21. On-time deliveries will also curb the middleman/investor element in the market who charges premiums to supply cars on time.
The company kept a check on indirect costs which remained 2 percent of revenues. Cost of sales per unit increased inevitably due to higher input prices and depreciation, but offset by the revenue flow. This allowed margins to drop only slightly. Other income rose with the increase in short term government securities. Encouraged likely by the strong bottom-line, the company gave final cash dividend of Rs45 per share (450%) in addition to the combined interim dividend of Rs95 per share.
With its decision to expand capacity, Indus Motors is set to retain its place in the market though its market share dropped to 24 percent from 28 percent in FY17 as both Honda and Suzuki grew in size. Toyota’s future is in the expansion of corolla production and the diverse sales mix. The company has done phenomenally well in the SUV market and has carved a niche for itself as most SUVs in the country are imported with hefty duties on them. Though the crossover Honda BR-V is also doing well, it is not quite in the same segment as Fortuner.
Competition will become intense starting FY21 as Kia and Hyundai start assembling vehicles locally. Kia’s 11-seater Grand Carnival (imported) is already on the roads and a few others are being shown at the dealerships. Access to market will not be too difficult despite the market being dominated by three seasoned players as there seems to be a widening demand-supply gap up for grabs. Though, major macroeconomic upheavals could bring the overall market down. Undoubtedly, success of new players will bode well for the market size. Existing automakers including Indus Motors may have to indulge into an exercise of adjusting their production and pricing strategies.
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