Autos: Margin growth drives up profits

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Automobile Industry

-Pak Autos notched up an impressive sequential profitability growth of 29% QoQ in Mar-Jun 2014 quarter notwithstanding 6% QoQ dip in unit sales; as sector’s Gross Margins (GMs) expanded to 11.5% from 8.0% in Jan-Mar 2014 quarter.

-Pak Suzuki Motor Company (PSMC) reported 34% QoQ higher earnings, while tax benefit lifted Indus Motor (INDU) profitability by 60% QoQ. That said, HCAR earnings dipped by 14% QoQ owing to presence of exchange gains in the preceding quarter.

Automobile Industry VS KSE

-With PKR gains over Feb-Apr 2014 leading sector’s growth in GM’s, recent weakness of the same has raised concerns over sustainability of sector’s margins.

-We flag that though PKR vis-à-vis USD is down 4% since mid-July; 5% depreciation of JPY vis-à-vis USD is likely to offset the impact of PKR weakness against the greenback. The said is evident in PKR/JPY parity, which has remained stable between Rs0.965-0.975 during this period.

-We maintain our preference for PSMC (Buy rated; TP Rs300) in JS Auto Universe, while appreciate recent turnaround in profitability of HCAR (Not Rated).

 

 

Automobile Sector Profitability

Pak Autos profit grow on margin boost
We flag Pak Autos impressive sequential profitability growth of 29% QoQ in Mar- Jun 2014 quarter, notwithstanding 6% QoQ dip in unit sales. Profitability growth was led by expansion in sector’s Gross Margins to 11.5% from 8.0% in Jan-Mar 2014 quarter on the back of Pak Rupee (PKR) gains vis-à-vis US Dollar (USD) and Japanese Yen (JPY) over Feb-Apr 2014. Note that during the quarter, average weighted price per unit declined by 6% QoQ vis-à-vis 10% QoQ decline in cost per unit. Pak Suzuki Motor Company (PSMC) reported 34% QoQ higher earnings, while tax benefit lifted Indus Motor (INDU) profitability by 60% QoQ (despite 37% QoQ lower unit sales due to phasing-out of the previous model of Corolla). That said, HCAR earnings dipped by 14% QoQ owing to presence of exchange gains in the preceding quarter.

Automobile Sector

JPY weakness to help sustain margins
With PKR gains over Feb-Apr 2014 leading sector’s growth in GM’s, recent weakness of the same has raised concerns over sustainability of sector’s margins. We flag that though PKR vis-à-vis USD is down 4% since mid-July; 5% depreciation of JPY vis-à-vis USD (JPY/USD: 10.6.3) is likely to offset the impact of PKR weakness against the greenback. The said is evident in PKR/JPY parity, which has remained stable between Rs0.965-0.975 during this period. Lackluster Japanese GDP, posting a decline of 1.6% in 2Q2014, drives the weakness in JPY. This marked the first quarter that the Japanese economy has contracted since 3Q2012. The Japanese government last week had signaled further stimulus, which can send the sagging JPY to even lower levels.

Preference for PSMC intact
We maintain our preference for PSMC (Buy rated; TP Rs300) in JS Auto Universe, while appreciate recent turnaround in profitability of HCAR (Not Rated). We flag PSMC’s impressive earnings growth of 44% in 2015F on the back of cab scheme announced by the government of Punjab. PSMC trades at an undemanding 2015F P/E of 6.3x vis-à-vis market’s 2015F 8.6x.

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