Morning Call about 4QFY11 EPS exhibits tremendous 64% QoQ growth – Arif Habib Limited

Karachi, September 21, 2011 (PPI): Indus Motor Company’s (INDU) financial result for FY11 came well above market expectations owing to better than estimated gross margins and lower effective tax rate of 25% recorded in the last quarter of the financial year.

According to Arif Habib Limited, in 4QFY11, the company recorded net earnings of PKR 1,141mn (EPS: PKR 14.51), a healthy rise of 64% QoQ. On a cumulative basis, the company posted net income of PKR 2,743 (EPS: PKR 34.90), a decline of 20% YoY. Lower profitability YoY is attributable to 120 bps contraction in gross margins coupled with lower other income. Along with the results, the company declared final cash dividend of PKR 10.0/share taking full year dividend to PKR 15/share.


Financial Highlights (PKR mn) 4QFY11 3QFY11 QoQ FY11 FY10 YoY
Net sales 16,415 18,460 -11% 61,703 60,093 3%
Cost of sales 14,875 17,312 -14% 57,614 55,382 4%
Gross profit 1,540 1,148 34% 4,089 4,711  -13%
Distribution & Admin Exp  342 335 2%  1,153 850 36%
Operating profit 1,199  813 47% 2,936 3,861 -24%
Other income 400 348 15% 1,508 1,801  -16%
Profit before taxation 1,529 1,053  45% 4,011 5,243 -23%
Taxation 388 358 9% 1,268 1,799 -30%
Profit after taxation  1,141 695 64% 2,743 3,443 -20%
Earning per share (PKR) 14.51 8.84 34.90 43.81    
Source: AHL estimates & company accounts


4QFY11 net earnings was a huge surprise

4QFY11 net earnings rose by 64% QoQ to PKR 14.51/share. Last quarter earnings was far above Arif Habib Limited’s expectations of PKR 7.25/share. This was primarily driven by higher gross margins and lower effective tax rate. Improved gross margins QoQ were due to higher deletion level owing to installation of new press shop. Moreover, during the period INDU booked effective tax rate of 25% despite flood surcharge of 15%. Lower tax rate was as a result of lower levy on mutual fund investments and tax credit availed on newly installed metal press shop installed recently.

Net revenues to increase by 3% YoY in FY2011

In FY11 net revenues exhibited a mere increase of 3% to PKR 61,703mn compared to PKR 60,093mn witnessed in the same period last year. This is attributable to higher prices despite volumes contracted by 3% to 50,579 units. Cuore and Corolla volumetric sales recorded a decline of 6%YoY and 13% YoY, respectively whereas Hilux volumetric sales posted a jump of 44% YoY. Moreover, gross margins in FY11 dropped to 6.63% compared to 7.84% observed in FY10 as PKR depreciated by 12% YoY against JPY resulting in cost escalation of the CKD components. The 120 bps drop in gross margins was lower than Arif Habib Limited’s estimations mainly due to gains booked in hedging JPY and US$ currency exposure.

Other income dropped by 16% YoY in FY2011

Other income recorded a drop of 16% YoY to PKR 1,508mn in FY11 compared to PKR 1,801mn posted in the corresponding period last year. Other income added PKR 19.2/share before tax, to the bottom line, 55% of total EPS for the period. The impetus behind healthy other income is the company’s ability to receive entire amount from its Corolla based customers, as delivery time for Corolla is 45-60 days. Cash & cash equivalents balance in FY11 stands at PKR13,805mn up by PKR 2,661mn from 3QFY11.

Volumes and margins to improve going forward

Going forward, Arif Habib Limited foresees profit margins to remain on the higher side and volumes are likely to register growth on the back of launch of Corolla CNG variants now and full year impact of locally assembled Hilux 4×4 which was launched in 2HFY12. Furthermore, the company plans to increase its presence in rural areas by opening 5-6 new dealership networks in FY12. Thus, this would further help in recording higher volumetric sales going forward. On the flip, uncertainty over government further relaxing auto import policy by allowing commercial imports up to 10 years and eliminating duty protection by reducing customs duty to 25% is a key risk to Arif Habib Limited’s investment thesis.


At the current price level of PKR 216.2/share, the scrip offers an upside potential of 13.3% based on Arif Habib Limited’s December 2011 DCF based target price of 245/share. Arif Habib Limited will be revising its earnings estimates soon due to expectations of company realizing better than estimated gross margins going forward as a result higher localization level.

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