JS Securities Limited – Morning Briefing

Karachi, April 12, 2019 (PPI-OT): INDU: 3QFY19 earnings to shrink by 19% YoY to Rs44.12

We preview Indus Motor’s (INDU) earnings for 9MFY19, where for 3QFY19, we forecast EPS to decline by 19% YoY to Rs44.12. This is due to a weak outlook on gross margins in a weakening rupee scenario.

Along with the result, the company is expected to announce an interim dividend of Rs25/share, taking cumulative dividend in 9MFY19 to Rs82.50/share.

We recommend ‘Hold’ on INDU purely on its higher dividend yield (FY19E: 10%) compared to other peers in the JS Auto Universe, where total return amounts to 2.5% to our target price of Rs1,170.

Earnings expected to drop 19% YoY in 3QFY19

Indus Motor Company (INDU) is expected to announce its results for 9MFY19 on April 26, 2019. We expect the company to declare Profit after Tax of Rs10.38bn (EPS: Rs132.06) for the period, translating into 11% YoY drop in profitability. For 3QFY19, EPS is anticipated at Rs44.12, a decline of 19% YoY than in the same quarter last year. Along with the result, the company is expected to announce an interim dividend of Rs25/share, taking cumulative dividend in 9MFY19 to Rs82.50/share, compared to Rs95.00/share in the same period last year.

Although net sales are expected to grow during the quarter by 12% YoY due to 4% YoY jump in volumes and price increases, an earnings decline is anticipated during the quarter. This is due to a 483bps YoY forecasted reduction in gross margins on the back of ~20% YoY devaluation of the local currency against the dollar. Sequentially, earnings are expected to inch up by 2% QoQ, due to a slight uptick in gross margins as the company increased prices during the quarter following depreciation at the end of the previous quarter.

Maintain Hold on D/Y

We recommend ‘Hold’ on INDU purely on its higher dividend yield (FY19E: 10%) compared to other peers in the JS Auto Universe, where total return amounts to 2.5% to our target price of Rs1,170. Given the sector’s challenges (new competition, currency devaluation, etc.), earnings growth outlook for the company does not look encouraging. Moreover, the company’s cash and equivalents have declined to Rs35bn by the end of its latest released financials (2QFY19) compared to Rs57bn at the end of FY18. The reduction in the company’s cash balance is mainly on account of lower advances from customers (down by 50% YTD FY19). A reduced cash balance will also impose pressure on the company’s other income in coming quarters, which will partly been cushioned by rising interest rates during 3QFY19 in our view.

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