Karachi, August 16, 2018 (PPI-OT): Indus Motor Company Limited – Did the Stock Rally in a ‘Rush’?
According to media reports, INDU is expected to launch imported Toyota Rush by the end of August. Due to expected high price tag, less successful earlier launch and availability of cheaper alternative (Honda BR-V), we expect annual sales for Rush to clock in around 450-500 units.
We expect Toyota Rush’s retail price to be around PKR4.0-4.4mn after incorporating Custom Duties, Sales Tax and FED on the latest global prices.
The stock has rallied 11% since the rumours hit the market (August 3, 2018); which we believe is unwarranted given our projections of only a meagre impact of the product on the bottomline.
INDU Stock Price Rally Unwarranted: According to media reports, Indus Motor Company (INDU) is expected to launch Toyota Rush by the end of August. The product will be a Complete Built Unit (CBU), likely to be imported from Indonesia. Looking at the product features, we feel Rush is comparable to Honda BR-V, which is being assembled in Pakistan since last year. However the price tag on Toyota Rush is expected to be much higher due to steeper tax rates on imported CBU’s (i.e. 60% customs duty on 1500cc, 17% sales tax and 1% FED). Note that 1500CC mini-SUV was previously launched in 2010 as Daihatsu Terios in Pakistan but was later discontinued.
Due to high landed cost (on the back of exorbitant import duties) and availability of a cheaper alternative (Honda BR-V), we believe annual sales for Toyota Rush could be around 450-500 units which would not have a meaningful impact on profitability (detailed calculation done below).
The stock has however rallied 11% since rumours hit the market (August 3, 2018) – such a sharp rally appears to be unjustified. On the flip side, if INDU later on decides to locally assembles the car and manages to bring the price tag closer to Honda BR-V (PKR2.1-2.4mn), then it can gain a significant foothold in this mini SUV/MPV segment and jack up its sales to over 5,000 units per annum.
Rush’s Price Likely to be Over 80% More Expensive than Closest Competitor: To analyze Rush’s expected price, we have taken Indonesia as an example. The reasons for choosing Indonesia are 1) similar market dimensions with that of Pakistan and 2) available pricing details of BR-V and Rush as both products are locally assembled over there. As per the latest actuals, the price for both products in all variants comes under USD 18,000 (PKR 2.0-2.2mn) converted from Indonesian Rupiah. This means that if Toyota Rush was locally assembled in Pakistan, the price should have been similar to that of BR-V (PKR2.1-2.4mn), but if the company brings Rush as CBU then we believe the price to be much higher due to customs duty, sales tax and FED.
Incorporating 60% customs duty, 17% sales tax, and 1% FED, we project the launch price to be in the range of PKR4.0-4.4mn.
Product Launch Unlikely to have a Meaningful Impact on INDU’s Profitability: During FY18, Honda BR-V recorded sales of 8,684 units, accounting for 17% of Honda Atlas Cars (HCAR) and 4% of total passenger and jeep sales in the industry. The product can be regarded as an instant success given its low price tag.
However the premium pricing on Toyota Rush is unlikely to allow INDU to grab a meaningful share in small SUV/MPV segment, as we project the company to sell up to 500 units per year. While that would almost double INDU’s sales of CBU units, it is unlikely to dent HCAR’s share in the segment.
Running back of the envelope calculations, by applying a 10% net margin on the product, Rush’s contribution to net earnings can stand at PKR200mn to the bottom-line (EPS impact of a meagre PKR2.5). Thus while we maintain a Buy call on the scrip, we feel the recent exuberance on the stock price may just be unwarranted.