HCAR reported a NPAT of PKR928mn (EPS: PKR6.50) for 1QMY22, vs. a net loss of PKR511mn (LPS: PKR3.58) SPLY but up 4% qoq, where the yoy comparison is distorted by complete lockdown in 1QMY21. This is an impressive result from HCAR, despite lower volumes (down 5% qoq), and has clocked in higher than our expected EPS of PKR5.88, mainly due to much higher-than-expected gross margins and lower Opex.

1QFY22 Result highlights include:

• Revenue of c.PKR22bn, down 4% qoq, due to an almost similar decline in volumes (down 5% qoq); however, it is largely in line with our estimates. The decline in volumes was mainly due to reduced working hours during Ramadan, extended Eid holidays and phasing out of the old City, in our view.
• Gross margins at c.7.3% came in higher than our expectation of c.5.5%, which is likely due to the favourable change in sales mix (more Civic sales than City) and discontinuation of the lower-end BRV variants, in our view. We believe that the lagged PKR/USD appreciation improved margins this quarter, amid a slight decline in shipping freights as well. The launch of the new City will further strengthen margins, in our view, due to the massive pre-bookings (according to channel checks, the 1,500cc variant delivery is now end-March).
• Financial charges clocked in at PKR11mn (no debt). Other income fell by a sharp c.35% qoq, likely due to the slowdown in customer advances and cash burn during the Ramadan/Eid holidays (increase in restrictions due to Covid-19), in our view.

Distribution expenses fell by a sharp c.60% qoq, despite a mere 5% qoq decline in volumes, likely due to a decrease in warranties and marketing expenses, in our view. Admin expenses decreased by c.20% qoq.

We expect the sales of HCAR to gain momentum in the coming quarters following the launch of new City model (due today). According to channel checks, pre-bookings for the new City (sixth generation model) have led to an influx of customers (also including investors, not just genuine consumers, in our view). The launch of the new City is a key trigger for HCAR, as it is likely to be a strong competitor for Toyota Yaris (launched in 2020). The conducive macro backdrop amid stable single-digit interest rates and the awaited new Auto policy, potentially including further reduction in taxes, are key catalysts for sales. We reiterate our Buy stance on HCAR, with a March 2022 TP of PKR500/sh.

Courtesy – Intermarket Securities Limited