IGI Securities Limited – Day Break

Karachi, June 21, 2018 (PPI-OT): Automobile Assembler – HCAR: Meek performance showcased; profitability up by +6%YoY to PKR 6.5bn (EPS:PKR 45.5) for FY18

We revisit our investment case on HCAR wherein we have revised our earnings estimates after incorporating financial year account (FY18) and budgetary measures. The company reported profitability of PKR 6.5bn (EPS: PKR 45.5) v/s PKR 6.1bn (EPS: PKR 43) during last year (FY17) along with the cash dividend of PKR 22.75/share.

Our earnings estimates for FY19E/FY20F/FY21F stands at PKR (44.7/41.4/40.6)/share after incorporating financial accounts and measures introduced in finance act 2018-19.

We have a “BUY” call on the scrip with our revised Dec-18 target price of PKR 584/share, offering +74% upside from its last closing. The company is currently trading at FY19E P/E of 7.5 x and offers a dividend yield of 5.3%.

We revisit our investment case on HCAR wherein we have revised our earnings estimates after incorporating financial year account (FY18) and budgetary measures. The company reported profitability of PKR 6.5bn (EPS: PKR 45.5) v/s PKR 6.1bn (EPS: PKR 43) during last year (FY17) along with the cash dividend of PKR 22.75/share. The overall stock performance remained volatile, underperformed by 31%YoY against the benchmark index. In addition, the company during the year made investment of PKR 1.3bn to increase its capacity and enhance its in-house manufacturing capability. With respect to budgetary measures, imposition of super tax will dent earnings in the short term whereas gradual reduction in corporate tax rate by 1% each year will ease down effective tax. Moreover, recent ban on non-filers will have major repercussions and we expect sales to suffer in short to medium term. In light of these factors, our earnings estimates for FY19E/FY20F/FY21F stands at PKR (44.7/41.4/40.6)/share, resulting in downward revision in our target price from PKR 623.9/share to PKR 584.0/share.

Volumetric growth and investments gain lifted earnings by +6%YoY to PKR 6.5bn (EPS: PKR 45.5)

For FY18 the company reported profitability of PKR 6.5bn (EPS: PKR 45.5) slightly up by +6%YoY attributed to multiple factors a) substantial increase of +42%YoY in volumes and b) gain (PKR 0.9bn) on sales of investments. However, the impact was partially arrested owing to heavy discounts (PKR ~1bn) coupled with rising input costs (PKR depreciation against USD), which altogether compressed margins (down by 310bps) and hence dampened profitability.

Net sales recorded at PKR 91bn (+44%YoY) as sales peaked 50k units

During the year the company attained peak sales of 50k units led by healthy sales of Civic, up by +29%YoY to 20k units, followed by sales of City (face-lift model), slightly up by +6%YoY to 21k units. In addition, further lift in volumes was supported by BR-V (contributing 18% in sales mix) with sales recorded at 9k units. As a result, net sales for the year clocked in at PKR 91bn v/s PKR 63bn last year.

Weakened currency and heavy discounts squeezed gross margins by 310bps

Gross margins during the year followed declining trend, sliding down by 310bps to 11.4% on the back of rising input costs (PKR depreciation). Although the company reciprocated with the increase in prices twice during the year but the impact was not fully passed on. Moreover, heavy discounts amounting to PKR 1.0bn (owing to late delivery after two months) coupled with increase (+31%YoY) in commissions chipped away sales of the company, thereby impacting top line and hence the margins.

Substantial gain on sale of investments propped up profitability by PKR 0.9bn

Backed by ample liquidity (PKR~ 200/share) with cash tied up in treasury bills/ funds the company realized a profit of PKR 0.94bn on the sale of investments, which provided some respite to the profitability.

Earnings to witness slowdown amid rising headwinds and uncertainty

Our earnings estimates for FY19E/FY20F/FY21F stands at PKR (44.7/41.4/40.7)/share after incorporating financial accounts and measures introduced in finance act 2018-19 vis a vis super tax charge (for FY19 the charge will be PKR ~0.5bn inclusive of PKR 0.27bn of FY18) and corresponding reduction in corporate tax rate.

In addition, with the ban imposed on non-filers and competition to kick-in sales volume will suffer amid sluggish growth. More so, following recent PKR depreciation we expect company to undergo price hike in the near future during FY19 and have adjusted our pricing assumption henceforth. Nevertheless, gross margins will remain shaky; however with the company, having made investment to increase its localization and taking initiatives as per se (enhancing in-house manufacturing capability) this may provide some relief and overcome reliance on imported raw material to a certain extent.

Recommendation

We have a “BUY” call on the scrip with our revised Dec-18 target price of PKR 584/share, offering +74% upside from its last closing. The company is currently trading at FY19E P/E of 7.5 x and offers a dividend yield of 5.3%.

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