• Japanese OEMs are expected to report a combined NPAT of PKR5.4bn for December 2023, reflecting a 30% QoQ decline in profitability. The sequential downturn can be attributed to weak sales and declining interest income.
• We expect Tractor OEMs to post a combined NPAT of PKR3.9bn, up 12% QoQ, mainly on the back of higher interest income amidst rising cash balances and higher tractor prices.
• Out of the Japanese OEMS, only INDU is expected to announce a dividend of PKR13.5/sh. Within Tractors, MTL and AGTL will announce a DPS of PKR 23.0/sh and PKR 40.0/sh, respectively.

Subdued sales volumes

After a sales surge in the preceding quarter (Sep’23), volumes experienced a 10% QoQ decline in this quarter. INDU recorded the steepest sales drop of 40% QoQ, contrasting with PSMC’s stable sales, which increased by 1% QoQ. Taking into account unit sales and price reduction by INDU and HCAR, we anticipate a QoQ sales decline of 51% for INDU and 19% for HCAR. PSMC, having maintained its prices, is expected to post a modest 1% increase in revenue due to stable unit sales. The total industry sales projection for this quarter is PKR56.4bn, reflecting a decline of 26% QoQ and 57% YoY.

Moderating margins and lower interest income to hit profits

Price reductions announced by INDU and HCAR in October, coupled with a shift in the sales mix for all three OEMs towards lower-margin products, should lead to a contraction in margins. INDU, HCAR, and PSMC are projected to report margins of 9.5%, 10.0%, and 13.7%, respectively. Furthermore, all three OEMs are anticipated to experience a decrease in Other Income due to declining cash balances and short-term investments, along with slightly lower yields on T-bills. The combined Other Income is projected to be PKR3.3bn, down 27% QoQ.

Tractor profitability remains robust 

Tractor sales experienced a 6% QoQ decline, primarily driven by a sharp 30% decrease in AGTL sales. Conversely, MTL managed to achieve a 10% QoQ growth in sales volume. For 4Q, we anticipate a combined revenue of PKR68.7bn for Tractor OEMs, reflecting a 2% QoQ increase. This increase in revenue, despite declining volumes, is attributed to higher tractor prices. Gross margins are expected to be 23.9% for MTL and 18.4% for AGTL. Additionally, combined other income is projected to surge by 148% YoY, driven by a 4.6x increase in cash balances in the September 2023 quarter.

We reiterate Marketweight stance

Despite the resolution of supply chain disruptions and a slight appreciation of PKR against USD, persistent elevated interest rates and weakened purchasing power due to inflation have kept auto profitability subdued. Tractor sales, which initially benefited from improved agricultural output, have also begun to decline in November and December, signaling ongoing demand challenges. We anticipate a potential improvement in sales volumes in 2024 as the SBP initiates monetary easing. INDU remains the preferred pick in the sector, with a target price of PKR 1640/sh, driven by the launch of the Corolla Cross. Additionally, INDU has already completed its CAPEX for a hybrid plant, unlike its competitors, and possesses the capability to maintain healthy dividend payouts in the future.

Courtesy – Intermarket Securities Limited.