Not unlike the rest of the economy, the auto sector has been dealt with some shoddy cards lately and that’s the hand they are playing with. In the case of Indus Motors (PSX: INDU), one would think it is surprising that despite a below-expectation drop in earnings by 6 percent in 1HFY19 year on year (Q1: down 3%, Q2: down 9%), the company is paying out an interim cash dividend of Rs25 per share (250%) in addition to Rs32.5 per share (325%) already paid out. The company’s stock price opened at Rs1314 but by the end of the day (post- result announcement) fell by 0.59 percent. Indus’ quiet confidence however comes on the back of what will be, rather than what is.
Volumetric sales in the first half have remained strong (up 8%) despite market claims that the sector is losing demand. If it is, Indus Motors has not suffered yet. This translated to a decent 21 percent growth in net revenues (Q1: 12%, Q2: 30%). The company along with its automotive peers has been raising prices in different phases since Dec-17. One of the Corolla’s models (as calculated) saw its price go up by 17 percent—as per PBS’ estimates, the index for vehicle prices grew by 14.68 percent over the past year. If companies have been dealt a poor hand on account of rising commodity input prices and depreciating rupee, they have compensated for it by passing the effect to the consumers.
Revenue per unit sold is up by 12 percent, based on calculations, but against costs, even the price adjustments did not stand a chance—cost per unit sold went up by 17 percent. Resultantly, margins suffered. Since Dec-17, the Pakistani currency has depreciated by 26 percent against the dollar while cold rolled coils (CRC) costs have gone up by 11 percent in the past year. These have led to higher average import costs for CKD/SKD kits as well as for commodity inputs including CRC and other materials. The company managed its other indirect expenses well by staying at 2 percent of revenues. Other income also improved due to higher interest rates.
Indus Motor is arguably one of the most popular brands in the country and demand refuses to slow down for variants like Corolla. Asked a month or so ago, the outlook for the auto industry was not positive but recent developments such as the removal of restriction on non-filers to purchase vehicles, and an added restriction on used cars imports may greatly tilt the scales in the OEMs favour.
Demand may persevere, even while the economy is cooling down. Moreover, Indus announced in Oct-18 that it would further raise prices in Jan-19 which would affectively bring the price of Corolla up by 21 percent or above Rs400,000. Will consumers pay that extra price? It seems like it. Even if demand slows down a bit, the company will get better margins for what it sells.
As the market expands—Kia and Hyundai both have already launched the first of their vehicles to ascertain market appetite—there will be competition. But it is less uncertain now whether the competition from new players would put a dent on the market share of players like Indus Motors whose brand loyalty is simply incomparable.
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