Indus Motor Company Limited (INDU) announced its financial result today, where the company reported a PAT of PKR 99mn (EPS: PKR 1.26) for 4QFY20. Cumulative PAT for FY20 stood at PKR 5.08bn (EPS: PKR 64.66) against a PAT of PKR 13.72bn (EPS: PKR 174.49) in FY19. The result underperformed our expectations where the main deviation emanated from lower than estimated gross margins for the quarter. The result also accompanied a cash dividend of PKR 7/sh taking total payout for FY20 to PKR 30/sh.

Net sales posted a decline of 69%/74% on QoQ/YoY due to lower operating days leading to dismal sales. To recall, the company recorded zero sales and production during the month of April-20 due to country-wide lockdown amid COVID-19 outbreak. On the other hand, the cost of sales declined by 63%/70% on QoQ/YoY.

Weak performance during the quarter resulted in a gross loss of PKR 324mn taking cumulative gross profit for FY20 to clock in at PKR 7.45bn. This is the first time in over a decade that the company has posted a gross loss. We suspect lower sales and currency volatility to be the key drivers of margin erosion.

Reduced economic activity and high-interest rates hampered auto sales during FY20 as total units sold decreased by 57% YoY to 28,378 units compared to 65,399 units in FY19. Among all variants, Toyota Corolla was the most affected as the number of units sold declined 22,140 units in FY20 compared to 56,720 units in FY19, translating into a decline of 61%.

We estimate gross margins to recover in the coming quarters on the back of recent price increases, lower interest and encouraging response of the newly launched model (Toyota Yaris). We have a NEUTRAL stance on the stock as we believe that the improvement in underlying fundamentals has already been incorporated in the stock price. The stock is currently trading at a forward P/E of 12.2x and a dividend yield of 4.5%. (BMA Capital Management Ltd.)