SBP import restrictions and the volatile exchange rates would remain challenging for the auto sector

The management of Indus Motor Company Limited (INDU) held a corporate briefing session on 8th Nov’22 to discuss 1QFY23’s financial result and future outlook.

Brief Takeaways

·         To recall, Indus Motors Company Limited (INDU) announced its financial result for 1QFY23 on 27th Oct’ 22, whereby the company posted a Profit After Tax (PAT) of PKR 1,297mn (EPS: PKR 16.5), down by 76% YoY. The cutback in profits was mainly driven by lower sales revenue (-43% YoY), resulting in negative gross margins. Alongside the result, the company declared an interim cash dividend of PKR 8.2/share.

·         Due to lower production and frequent plant shutdowns on the back of limited imports allowed by SBP, the sales volume of CKD units went down by (52.4% YoY).

·         The gross loss recorded by the company was also contributed by higher input costs amid PKR depreciation against the greenback in the outgoing quarter.      

·         Albeit, the company’s manufacturing loss was overcome by higher other income, which was recorded at PKR 5.2bn (+152% YoY) in 1QFY23. The upsurge in other income was due to higher returns on short-term investments as interest rates remained high.

·         Despite fluctuations in the exchange rate, the company did not pass the impact on to the customers and delivered the vehicles at committed prices.

·         Management stated that the SBP import restrictions and the volatile exchange rates would remain challenging for the auto sector.

·         Management also mentioned that the industry is bearing the burden of escalating production costs on account of the current rupee depreciation, while demand has also declined due to the prevailing economic downturn with higher interest rates and augmented duties and taxes on vehicles.

·         Furthermore, it stated that the recent flood destruction along with higher inflation and low purchasing power of consumers will hurt demand of the entire auto sector in upcoming periods.

·         Management believes that government should remove import restrictions as the auto sector only comprises of 3% of the total import bill.

·         The localization rate, in terms of value, of Corolla and Yaris stands at 65%, while for IMV and Fortuner it stands at 55%.

·         The management stated that there is a reduction from 35% to 10% in auto sales through financing, and it has resulted negatively in INDU’s sales.

·         The management foresees another quarter of manufacturing loss given import restrictions remain in place.

Courtesy- AHL Research

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