JS Securities Limited – JS Research (12-11-2019)

Karachi, November 12, 2019 (PPI-OT): INDU: 1QFY20 Analyst Briefing Highlights

INDU recently held its quarterly Corporate Briefing to discuss its performance during 1QFY20. The company’s EPS had declined massively by 62% YoY to Rs16.78, compared to Rs44.63 in the same quarter last year. The company also announced an interim cash dividend of Rs7.00/share, compared to Rs32.50/share in 1QFY19.

The management will attempt to maintain demand by absorbing additional costs (to an extent) if they arise by not increasing prices further. It should be noted that the tone in the past was much more confident where the company would usually state unequivocally that costs would be passed on.

2QFY20 is expected to be yet another challenging quarter for the company in terms of volumes and earnings as customers normally defer their purchases for the next year to avail next year registration with resale values in mind.

Indus Motor Company (INDU) recently held its quarterly ritualistic Corporate Briefing to discuss its performance during 1QFY20. To recall, the company’s net earnings after tax had declined massively by 62% YoY to Rs1.32bn (EPS: Rs16.78), compared to Rs3.51bn (EPS: Rs44.63) in the same quarter last year. The company also announced an interim cash dividend of Rs7.00/share, compared to Rs32.50/share in 1QFY19. The massive decline in profitability was mainly as a result of declining volumes (down 57% YoY), which also impacted gross margins (down 477bps YoY). Moreover, given the decline in demand, bookings slowed down and hence cash advances for the company severely declined, leading to a 34% YoY plunge in Other Income during the quarter.

Key highlights of the Corporate Briefing were as follow:

The company’s trading revenues increased by 17% YoY due to higher volumes and higher prices on account of devaluation. The company’s margins for the trading business also increased by 827bps YoY. Although the growth in profitability of the trading business is encouraging from the company’s perspective, it should also be noted that the manufacturing segment which comprised over 90% of net revenues in 1QFY20, saw gross margins shrink by 638bps YoY, compared to 477bps YoY decline in overall gross margins.

2QFY20 is expected to be yet another challenging quarter for the company in terms of volumes and earnings as customers normally defer their purchases for the next year to avail next year registration with resale values in mind.

The company expects margins to stay relatively stable over the next few quarters (unless there is sharp devaluation) and are actively striving to improve efficiencies and reducing overheads.

Given the current state of volumes, the company will attempt to absorb unforeseen additional costs (to a certain extent) rather than increase prices to maintain demand.

The company’s Other Income contributed 39% to Profit before Tax (coincidentally the highest contribution since Sep-2014), which is one indication of how significantly core profitability has declined during the current quarter.

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