AKD Securities Limited - AKD Daily (19-May-2023)

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AKD Securities Limited – AKD Daily (19-May-2023)

May 19, 2023

Karachi, May 19, 2023 (PPI-OT): PSMC- In dire straits

PSMC gross margins are expected to have around ~11% in 2QCY23 vs 9.1% in 1QCY23 mainly attributable to price hikes that a lagged impact during the period. On a longer term perspective, gross margins are expected to average around 5.8% between CY23 to CY27 vs 3.83% in past three years.

The finance costs have shrunk PSMC equity to ~PkR7bn compared to PkR19.8bn reported in the last quarter. As per management of PSMC, the operations have shifted from an open account system to letter of credit, as a result of which company will first have to make payments in order to receive goods. It will also reduce foreign payables on which it has historically incurred exchange losses. Therefore, we expect finance cost to clock in at PkR2.9bn in the next quarter down by 77%QoQ.

We expect demand to remain pressured amid low production coupled with high prices and restriction on auto financing (30% of total demand). Resultantly we expect 37%YoY dip in volume in CY23. On a longer term perspective, volume is expected to increase at a CAGR of 15% over our investment horizon.

The stock is currently trading at ~3.9 times its CY24 earnings, compared to a P/E of 0.9x averaged over the past 6 years. We have a “Sell” stance on the stock with a Dec’23 Target Price of PkR118.8/sh, which offers a total return of 16.8% from the last close.

Better Gross margins ahead: PSMC has hiked the prices across all variants by cumulatively 21% with major increases witnessed in Wagon-R and Cultus variants by around 22%, followed by Swift 21%. In addition to this, Alto prices have been increased by 19% on average. The price hikes are mainly attributed to PkR devaluation wherein PkR depreciated by 25.2% in 1QCY23. With this, PSMC gross margins are expected to have around ~11% in 2QCY23 vs 9.1% in 1QCY23 mainly attributable to price hikes that has a lagged impact during the period. On a longer term perspective, gross margins are expected to normalize to an average around 5.8% between CY23 to CY27 vs 3.83% in past three years. To note, our estimates incorporate price of variants to increase by 12% annually over our investment horizon.

Bottom line under red zone: PSMC reported highest quarterly loss of PkR12.9bn (EPS: PkR156.7) in 1QCY23. This significant loss came on the back of high finance costs, clocking in at PkR12.8bn up by 1.58x/11.43x QoQ/YoY in 1QCY23 along with lower sales volume, down by 70%QoQ. Company’s finance cost includes exchange loss coupled with demurrage charges incurred for stuck consignments and interest costs on advances from customers amid delay in deliveries. The finance costs have shrunk PSMC’s equity to ~PkR7bn compared to PkR19.8bn in 4QCY22. As per management of PSMC, the operations have shifted from an open account system to letter of credit, as a result of which company will first have to make payments in order to receive goods. While this may curtail company operations, it will also reduce foreign payables on which it has historically incurred exchange loss. Therefore, we expect finance costs to clock in at PkR2.9bn in the next quarter down by 77%QoQ.

Volume to take a hit: In order to curb high import bill government of Pakistan has imposed restrictions on import of luxury items (including Auto CBU and CKD kits) leading OEMs to witness frequent plant shutdowns. To note, PSMC plant remain shut for 18 days in 1QCY23. Consequently, sales volumes have decreased significantly, down by 78%YoY in 4MCY23. Furthermore, due to unavailability of CKD kits the delivery times increased to 10 months from initially 3 months. Going forward, we expect demand to remain pressured amid low production coupled with high prices and restriction on auto financing (30% of total demand). Resultantly we expect 37%YoY dip in sales volumes in CY23. On a longer term perspective, volume is expected to increase at a CAGR of 15% over our investment horizon.

Investment perspective: Critical times for Auto Manufacturers are seemingly here to stay, where the supply chain issues like shortage of inventory causing OEMs to frequent plant shut- downs. Furthermore, high prices and increased interest rates along with restrictions on auto financing pose a major downturn for OEMs in terms of subdued demand. However, in terms of price hikes we believe PSMC is slightly protected from its competitors as PSMC operates in price sensitive markets while INDU and HCAR focuses on high end brand variants. The stock is currently trading at ~3.9 times its CY24 earnings, compared to a P/E of 0.9x averaged over the past 6 years. We have a “Sell” stance on the stock with a Dec’23 Target Price of PkR118.8/sh, which offers a total return of 16.8% from the last close.