Despite highest ever profits during the first quarter (of FY12) on account of better gross margins, continuous weakening of the rupee against Japanese yen and US dollar and subdued volumetric growth are expected to keep the Indus Motor’s gross profitability in check, analysts say.
Further, the analysts believe, resurfacing of regulatory risk due to concerns over revision in Auto Industry Development Plan (AIDP) policy, due to be announced in this fiscal year, has also compelled the observers to associate higher discount to the Indus’ valuation.
“Indus Motors will be able to post a decent growth in profitability of 17 per cent in FY12 due to higher car prices rendering into higher absolute margins and improved other income amid better cash position,” viewed Furqan Punjani at Topline Research. “We expect Indus to post EPS of Rs41.0 compared to EPS of Rs34.9 in FY11,” the analyst added.
He said since the Japanese earthquake, yen had gained strength against other major currencies on account of reconstruction activities.
During FY12YTD, Pak rupee has depreciated by 2 per cent (post intervention) against yen, which was expected to mount cost pressures on local car assemblers as imported CKDs and other high tech parts were yen-denominated.
This, coupled with reducing pricing power due to recent relaxation in used car imports, would also kept gross margins under pressure. Thus, with all these risks expected to continue in FY12, we estimate gross margins to clock at 6.8 per cent, up by a meager 20bps assuming 5-6 per cent increase in car prices. However amid continual interventions by Japanese government to curb Yen’s appreciation, Indus has capitalised through forward booking from the parent company. Thus, if these interventions continue, gross margins may increase due to aforementioned reasons. With squeezing farm income due to higher cost pressures and lower agri-product prices, tmajor sales market for Indus is expected to remain muted.
Furthermore with no revival in consumer financing despite reduction in discount rates, sales from urban areas would also depict meager growth.
Therefore, current pace of volumetric sales (up 9 per cent in 3MFY12) is not a true depiction of full year sales and would ease going forward.
It is expected that Indus would show minute growth of 5 per cent in locally assembled car to 52.5k units compared to 50.0k units last year. “The major growth driver would continue to be prime Corolla with its newly launched Eco models with cheaper fuel source (CNG),” Furqan said.
Apart from fundamental concerns, the analyst said, local car assembling industry was also surrounded by regulatory risks like recently relaxed used car policy and upcoming AIDP policy.
Government is expected to announce a revised AIDP policy in current fiscal year with new import tariffs for CKDs and CBUs, he said. “The news flow in recent months have also indicated that government might also peruse relaxing the new entrant policy by reducing duties on CKDs in first, second and third year to 5 per cent, 10 per cent and 15 percent, respectively,” Furqan said.
Japanese are blood suckers. In Japan, brand new Corolla with much better options and finishing (because of made in japan) is available at 12,000 usd, about 1 million pak rupees after paying minimum wages of usd 4,000 to the worker.
In Pakistan they pay 10,000 rupees to a worker, lousy technology with lousy quality and finishes, charges minimum of 20,000 usd per Corolla.
This means it is the Pakistani car manufacturers who are blood suckers rather than the Japanese.
Its the Pakistani taxation system which inflates the prices. I find the quality of cars almost the same at least from the last three / four years.
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