HCAR has reported a NPAT of PKR939mn (EPS: PKR6.58) for 2QMY22, flattish qoq, while up a sharp 43% yoy (distorted due to lockdowns last year). This took 1HMY22 EPS to PKR13.08, up from an EPS of PKR1.02 last year (loss incurred in 1QMY22 due to complete lockdown in April 2020). This is a relatively weak result from HCAR, compared with the strong earnings beat of INDU and PSMC, and lower than our expected EPS of PKR8.98, The variance is largely due to (i) lower-than-expected gross margins, (ii) higher other expenses, and (iii) higher-than-expected taxation.

2QMY22 Result highlights include:

Revenues of c.PKR26bn are up 20% qoq due to an almost similar increase in volumes (up 21% qoq); they are broadly in line with our estimate. The rise in volumes was largely due to the rolling out of new City (pre-booked orders), and pent-up demand following the easing of restrictions post-religious holidays, in our view.

Gross margins at c.6.9% has come in lower than our expectation of c.7.2%, which is likely due to (i) change in sales mix towards new City from Civic, and (ii) sharp rise in raw material costs amid elevated commodity prices and PKR/USD depreciation of c.6% qoq, in our view. Margins are likely to correct further in the coming quarter due to greater PKR weakness, despite recent price hikes of c.3% (average) for the Nov-Dec period (total price increase of c.6% to be effective by Jan 2022).

Financial charges clocked in at PKR28mn (negligible debt). Other income rose by a sharp c.55% qoq to PKR516mn, due to a rise in customer advances (increase in cash balances), in our view. Other expenses clocked in at PKR344mn, up c.80% qoq, due to exchange losses, in our view.

Distribution expenses increased by a sharp c.60% qoq, attributed to the growth in volumes and advertising expenses around the launch of new City, in our view. Admin expenses increased by c.20% qoq.

We expect the sales of HCAR to remain healthy in the coming quarters as the effect of the new City continues. According to channel checks, HCAR is presently focusing on rolling out orders of new City due to the large pre-bookings (delivery lead times of all City variants now at least 4mths). The delay in price hikes will keep margins under pressure in the coming quarter, while plant shutdown of 10-15 days recently (according to channel checks) on account of part shortages will further hurt profitability, in our view. The prevailing macro backdrop (rising interest rates and weak exchange rate) and sharp increase in prices will dampen future sales. However, the announcement of a new Auto policy (potential reduction in taxes) and further price increases, effectively from January 2022, may cushion the margin. We have a Buy stance on HCAR with a March 2022 TP of PKR300/sh.

Courtesy – Intermarket Securities Limited.