Karachi, January 16, 2023 (PPI-OT): Autos: Higher working days may lift QoQ profits in 2QFY23

We present earnings preview for the Auto sector (Dec-2022 quarter), where we expect the sector to return to profits primarily driven by 50% QoQ growth in volumes owing to higher operating days.

Volumes in the upcoming quarters are expected to remain under pressure as the prevailing subdued demand is now expected to be hit by an even more severe supply side crunch.

We, however, reiterate our Underweight stance on the sector where we expect profits to remain restricted in the upcoming quarters based on limited volumes with pressure from both demand and supply side and depressed margins amid escalating cost of production.

Higher operating days propels sector back into green zone

We present earnings preview for the Auto sector (Dec-2022 quarter), where we expect the sector to return to profits after bearing losses last quarter driven by 50% QoQ growth in volumes owing to higher operating days and lower compensation paid to customers for late deliveries. Other income is expected to shrink as cash balances for the automakers are used up with lower order intake.

PSMC: Higher volumes to limit losses for the year

With volumes almost doubling QoQ to 32k units, we expect 4QCY22 EPS of Pak Suzuki Motors (PSMC) to move back into positive territory after returning losses in the previous quarter improving to Rs2.1, also supported by stable margins. Net sales are expected to more than double in line with growth in volumes owing to higher operating days (no closures in Nov-22 and Dec-22) and spill over demand from the previous quarter. Support from other income is expected to weaken as the companies cash balance dries up whereas finance costs are expected decline sequentially as well as compensation to customers for late deliveries normalizes with lower order intake.

INDU: Gross margins to return to familiar territory

Indus Motor Company Limited (INDU) is expected to post an EPS of Rs39.6 for 2QFY23 as compared to Rs16.5 during previous quarter. Net sales are expected to clock in at Rs46bn, up 22% QoQ, owing to higher sales volume by 6% QoQ with the growth coming from the higher priced vehicles (Fortuner and Hilux). Margins, on the other hand are expected to recover to 5% after hitting negative territory owing to higher cost of production and more importantly compensation paid to customers for late delivery. Support from other income is expected to diminish 26% QoQ as well as cash balances get squeezed with lower order intake.

HCAR: Bottom-line to return to profits

Honda Atlas Cars (HCAR) is expected to post an EPS of Rs1.24 for Dec-2022 quarter as compared to an LPS of Rs2.7 during previous quarter. Net sales are expected to improve 10% QoQ despite lower sales volume owing to improvement in sales mix post the launch of HR-V. Gross margin is expected to remain close to 4% as pressure from rising cost of production and lower volumes remains intact. S and D expenses are expected to swell 50% QoQ owing to higher costs associated with the launch of HR-V whereas other income is expected to lose momentum as cash balances shrink with lower order intake.

Supply side issues to worsen, demand to remain depressed

Volumes in the upcoming quarters are expected to remain under pressure as the prevailing subdued demand is now expected to be hit by a more severe supply side crunch. To recall, the SBP has recently replaced the quota system allocated to automakers for import of CKD kits with a priority list handed over to banks along with the responsibility of opening LCs. The said list prioritizes import of essential items leaving little room for auto imports. Margins are expected to witness pressure too as US$ remains volatile and volumes remain dull in the sector. We reiterate our Underweight stance on the sector where we expect profits to remain restricted in the upcoming quarters based on the factors discussed above.