Analyst Briefing: INDU likely to hike vehicle prices to counter rising commodity costs

May 10, 2021 (MLN): Indus Motor Company Limited (INDU) held its corporate briefing recently to deliberate the latest financial performance and to shed light on the future outlook of the company.

To recall, the company posted a 68.8% YoY increase in net profits for 9MFY21 to Rs8.4bn (EPS: Rs107.07) as against the profits of Rs4.98bn (EPS: Rs63.4) in the corresponding period last year.

The upsurge in INDU’s profitability was mainly attributable to higher sales volumes and an increase in other income, due to the improved cash fund position of the Company.

The sales volumes improved in all segments, mainly due to pent-up demand after lockdown and lower interest rates during the period under review. The Company also experienced an overwhelming response to Toyota Yaris in the first, as well as the second quarter of the fiscal year 2020-21 which contributed to the increase in volume in the Passenger Car segment.

However, the increase in the cost of sales by 77% YoY mainly due to a rise in international steel prices and higher freight which minimized the impact of Rupee appreciation, resulted in a reduction in gross profit margin to 8% against 10% in the same period last year.

The management said if the commodity prices fail to stabilize, the company may increase vehicle prices to pass on costs.

After the great response of the new Corolla’21, the company has also launched a new facelifts version of the Fortuner and Hilux. The management stated that the delivery times will be around 4 months due to strong demand.

To meet the overwhelming demand, INDU has been operating on a double shift basis. INDU had already announced the expansion of its total capacity to 80K units from its current capacity of 65k units (Capex of Rs4-5bn). This capacity expansion was expected to come online by Sep’20 but got delayed due to the pandemic.

Since Yaris accounts for more than half of the volumetric sales, the launch of the new Honda City is likely to chip away some of its market shares, in view of a report by Foundation Securities.  However, the delivery time to City 21 will be longer, while Yaris is currently available for delivery in less than 1-2 months, which may attract buyers to opt for INDU's offer.

The management also highlighted that the company faced shipment/container delays during Nov’20-Feb’21, but its supply chain team kept margins in check while maintaining delivery times. Going forward, the international supply chain disruption is under control and the company is also not severely affected by the global semi-conductor shortage, Taha Madani, Research Analyst at BMA Capital said.

With regards to a support package and incentives to produce hybrid vehicles, like those given in the EV policy, the Auto industry is in constant talks with the government. INDU’s management also shared its recommendation for the upcoming auto policy which includes removal of Federal Excise Duty (FED) and Additional Custom Duty (ACD) to improve the dynamics of the automobile market.

Speaking of automobile market growth, the management estimates that it will grow to 0.24/0.30Mn units by the end of FY21/22 and effortlessly to 0.5Mn units by FY26-27. This robust demand is likely to create room for all existing and new local players to maintain steady growth, he added.

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