EUR 50.00 For Business Accounts Only

Pakistan Automobiles: Autos earnings to decline in last quarter due to Covid; Strong recovery to follow

• We project Topline Autos Universe earnings to decline sharply in Mar-Jun 2020 quarter owing to decline in unit sales and depletion in Gross Margins.
• Within the Autos Universe, car assemblers are likely to be the most hit as the government had imposed lockdown across the country in the later half of Mar-2020 which continued on till the end of May-2020.
• The volumetric sales of our Auto universe (INDU, HCAR, PSMC and MTL) are down by 70% YoY and 47% QoQ to 19,014 units. It is pertinent to mention that in Apr-2020 no car sales were recorded by companies under our Universe, while in May-2020 only 4,473 units were sold.
• The manufacturing operations of Indus Motors (INDU) and Honda Car (HCAR) remained non-operational for 55-60 days, while Pak Suzuki Motor (PSMC) manufacturing was only operational for the last 15 days of the quarter (total non-production days: 75).
• We expect this to further deplete Gross Margins of the assemblers by 2-5ppts QoQ as fixed costs/unit is likely to substantially increase due to lower sales.
• Government allowed agricultural activities during the lockdown period along with exemption status to Tractor manufacturers. Millat Tractors (MTL) resumed its operations in mid Apr-2020, which helped the company in recording sales even during the lockdown period.
• We have currently BUY stance on INDU and MTL. Low interest rates and improving farmer economics are likely to result in strong recovery in unit sales going forward.
• INDU: We expect Indus Motors (INDU) to record an EPS of Rs7.6 in 4QFY20, down 78% QoQ and 83% YoY. The fall in earnings is mainly due to drop in unit sales by 81% YoY and decline in Gross Margins (to 7% from 9.3% in 4QFY19). During the outgoing quarter, INDU has started delivery of its newly launched Yaris. The highly anticipated model recorded sales of 1,327 units in 4QFY20.
• INDU maintained short term investments of Rs31bn in 4QFY20. Other income will be a major contributor (Rs8.9/share). We expect a cash payout of Rs2/share, taking total payout to Rs25/share for FY20.
• HCAR: We expect HCAR earnings to breakeven for 1QMY21 (EPS: Rs0.0). In its preceding quarter HCAR recorded a loss of Rs0.2/share due to application of turnover tax (effective tax rate of 105%) and high finance costs. We expect sequential improvement due to normal effective tax rate and lower finance costs due to substitution of local currency loan with short term loan of USD14mn at a markup rate of 3.2% from Asian Honda Motor Co. (a related party).
• Earnings will be down on a YoY basis due to 72% YoY lower sales and 535bps YoY depletion in Gross Margins.
• PSMC: PSMC is expected to record a loss of Rs13.2/share in 2Q2020. The company losses are likely to accentuate during the quarter on both YoY and QoQ basis due to plant shutdown amidst COVID-19 related lockdowns. The company’s sales are down by 75% YoY during the quarter, while Gross Margins are likely to clock in at ~1% for 2Q2020.
• The Finance Cost is likely to be a continuous drag on the company’s  profitability as PSMC is highly leveraged (D/A ratio of 41%).
• MTL: We expect MTL to record an EPS of Rs12.4, up by 11% QoQ while down by 29% YoY. The volumetric sales of the company were up by 13% QoQ, while down by 28% YoY.
• The Gross Margin of the company is expected to remain stable at 18% compared to 18.4% in the last quarter.

We expect a final cash payout of Rs20/share, taking total payout to Rs40/share in FY20.