Indus Motors: Re-beginnings

Indus Motors (PSX: INDU) is expected to double volumetric sales in the four months ending FY21 against last year. In the first quarter, fresh out of Covid lockdown, the company sailed through a 75 percent growth in volumes and a 40 percent growth in earnings. Its dividend payout of 51 percent during the quarter is already higher than last year and expected to soar as the year ends — in line with previous payout ratios and signalling the company’s strong confidence for its future.

And for one very good reason: Pakistanis want Toyota cars, competition notwithstanding. Despite steep price hikes over the past two years, Toyota cars continue to dominate the market and are the first to revive when the overall auto market is down. That customers pay hefty “own” on Toyota cars (especially its Corolla variants) is evidence that too frequent price hikes have not kept customers away.

Surprisingly, gross profit per unit sold for Indus Motors has fallen by 34 percent during the quarter while margins contracted down to 7 percent (from 10 percent in 1QFY20) indicating increase in input costs (steel, plastics and other commodities), only worsened by the rupee depreciation in the quarter against last year. Despite that, reduction in overheads (as a share of revenue) down to 2 percent from 4 percent last year and a growth in other income (constituting 41 percent of the before-tax profits against 39 percent in 1QFY20) shored up earnings.

That the company is earning less than 60 percent of its profit from its primary business could be concerning; but, investors fundamentally care about the bottom-line and potential growth of revenue which are phenomenal for an automotive assembler in the current global scenario. Demand is expected to only grow as corporates and individuals go back to business-as-usual and it seems Kia and Hyundai have not put too much of a dent in the market (in terms of grabbing market share) despite considerable sales to their credit.

In addition, with auto financing costs down, Toyota buyers will typically pay less on car loans than they did last year on an estimated monthly payment (Read “Curb your enthusiasm”, Oct 26, 2020) which will be an added bonus. Already, net borrowings for auto loans are hovering over their historic peaks and will sustain until interest rates substantially come up again.

Corolla will continue to sustain market share while Yaris’ rise will also not be surprising as the model replaces some of Corolla’s smaller variants. The two will divide and conquer. One thing is for sure, Indus Motors is back with a bang!