INDU: It’s not over

It seems too easy to be Indus Motors (PSX: INDU). After revenues dropped 43 percent during 1QFY23, and the company incurred a gross loss, higher than the one it incurred during the covid-quarter when sales had dropped dramatically, INDU earned Rs1.3 billion in after-tax earnings for the quarter, up 2.5x from the previous quarter.

The revenue drop was expected as supply constraints induced by recent government efforts to curb demand have slashed volumes considerably across the board. The government has placed restrictions on the import of CKD kits and informal quotas are in place across the industry for the import of these inputs which has triggered a shortage in supply. The company’s volumes shrank 52 percent in 1QFY23. The sales mix and higher car prices allowed revenue per unit sold to increase 19 percent but costs have become a noose. Rupee devaluation and higher freight caused costs to balloon—up 42 percent per unit sold. This prompted margins to crash and burn.

However, the company’s “other income” more than made up for it with investments and cash balances, making money for the company that is not coming from its primary business operations. During the quarter, other income as a share of before-tax earnings stood at a whopping Rs5.2 billion, 2.8 times of before-tax earnings, or nearly 4 times the size of the company’s current after-tax profits.

Finance costs for the company remain negligible (as a share of the company’s large top-line) while overheads and other charges stay at 3 percent of revenue, matching the mean expenditure incurred by the company over the past 20 quarters. The company is at 3 percent net profit margins during the quarter but likely to signal confidence, a final cash dividend was announced which was a pay-out ratio of 50 percent. For the past 20 quarters, the average payout ratio is roughly 57 percent (not taking into account the covid quarter where dividend per share was 6x the earnings).

In the coming quarters, there may be trouble in paradise. Even if/when supply restrictions ease, demand-side issues will surface as consumers become more cautious about spending on expensive cars at a time when inflation is sky-rocketing and taxes are going up. Cost of bank financing has also surged making it ever more expensive to purchase vehicles by availing formal lending avenues that are still accessible.