Brief history: Indus Motor Company Limited (PSX: INDU) was incorporated in 1989, which is a joint venture agreement between House of Habib of Pakistan, Toyota Motor Corporation and Toyota Tsusho Corporation of Japan. The company is in the business of manufacturing and marketing Toyota brand vehicles in Pakistan.
The company's flagship variant Corolla is the most popular car in Pakistan, especially in the high-engine category. The company also has Hilux in the light commercial vehicles segment and the Toyota Fortuner in the Sports Utility Vehicle (SUV) category. The facility has a capacity of about 60,000 units annually. The company has a network of over 60 vendors supply locally manufactured parts and over 27 technical assistance agreements between world renowned manufactures and Pakistani vendors.
Shareholdings and stock performance: Majority stakes in the company are held by Overseas Pakistan Investors AG (35 percent of all shares). Meanwhile, 25 percent of the company are held by Toyota Motor Corporation; 13 percent with Toyota Tsusho Corporation while 6 percent are held by Thal Limited. General public holds 7 percent of the company's stocks.
INDU is the most expensive stock in the industry-its stock price having gone up from Rs 998 to Rs 1,808 in January 2017. The stock has rallied well against the benchmark index after September and is performing a lot better than PSMC.
Operational and financial performance: On average, the company has sold 50,000 units a year but sales surpassed the 60,000 mark in FY16 as demand boomed. The company has also found a niche market for Fortuner which are selling like hot cakes. Hilux will gain further popularity because of its reputation in the market as well the increased demand for commercial and logistics vehicles. The company procured more than Rs 40billion worth of parts from local sources during FY16.
The company has substantially increased its market share- particularly in the car segment significantly. The market share remained 20 percent and under till FY08 but this share reached 35 percent in FY10 and today, Corolla has a share of 32 percent in the car market. Other cars have come and gone but Corolla has remained a mainstay the country's car industry.
Revenues for the company have climbed substantially over time even when units sold per year did not increase as much in the past decade. Sales have gone from Rs 35 billion to Rs 109 billion between FY06 and FY16. Costs are dependent on international prices for different auto parts and inputs like steel; which is why margins have remained between 6 percent and 12 percent over the years. Due to the dependence on imports, the yen to dollar parity has also affected margins over the years depending upon the strength of the yen. Stronger yen recently has hurt margins for local automakers recently.
The company's bottom line has expanded from Rs 2.6 billion to Rs 3.9 billion between FY06 and FY14. The company reached a phenomenal high last year. In fact, earnings jumped by 135 percent in FY15 and reached Rs 11.5 billion in FY16. The Earnings per share has also grown accordingly. No doubt there is a reason why INDU remains one of the strongest scrips in the stock market.
In latest developments, the company just came out with Hilux-Revo, which is gaining traction fast while Corolla might be up for a facelift which would sit well with those consumers looking to buy an upgrade as well as those who are seeing a higher purchasing power and looking to shift from smaller cars. Aside from its excellent quality that globally consumers rave about, Corolla is also the better priced compared to Honda's Civic.
Snapshot of half year financials: The company is having a slower FY17 so far, with a decline in sales numbers for both Corolla and Fortuner and clinched earnings as a result compared to 1HFY16. The company was undergoing maintenance and up-grade of its plant that may have led to reduced capacity utilization. In 1HFY17, Hilux sales grew because of the new model Hilux Revo launch, but the company sold 300 less of its flagship variant Corolla compared to the period last year; while Fortuner sales also fell, according to data reported by PAMA. Revenues did not fall and remained about the same levels in 1HFY17 as last year, clocking at Rs 51.4 billion supported by the higher priced variants of Corolla sales and the new Hilux.
The subdued revenues were offset by favourable costs and improved margins (17% from 16%). The company managed to cut costs despite higher prices for steel, which is commendable, ultimately cushioning the blow to the bottom line (growing by 3 percent in 1HFY17 year on year) even with higher than expected indirect expenses and finance costs.
Competition, auto policy and the future of INDU: Despite Corolla's excellent popularity that it has maintained through every phase in the country, there is no denying that the three Japanese carmakers have maintained a monopoly in the car segment. And the auto industry has also enjoyed protection from the government in the form of much high import duties and other similar advantages. The existing capacity of the three carmakers is about 250,000 and about 75 percent of the capacity is being utilized.
On the demand side however; limited choice, limited brands and models in different segment have over time forced consumers to shift to cheaper, and better quality imported used cars. Keeping that in mind, the government came up with an auto policy last year that gave incentives for new investors-Greenfield projects as well as revitalisation of sick units.
This has led to several big names expressing interest in Pakistan's growing appetite for cars and at least three new entrants have confirmed. French carmaker Renault; Korea's Hyundai and kA have all signed on with local partners; Ghandhara Nissan, Nishat and Younus Brothers' Lucky respectively to bring new models into the Pakistani market. German Audi is in the process of negotiations.
This opens the door for greater competition in a market that is seeing a growth in average income levels but still has a very low car penetration rate. New plants, new variety, more models, and more choice tie in well for the industry's growth but it also means tougher competition.
With more variety, it is very possible that the market share of existing carmakers will get overridden in the process. Prices may also see a downward turn once the new players establish local presence in the market- (initially new models will be imported in CBU form).
As we have said earlier also: "Some may assume that it will take years for new entrants to find their footing in an industry where Honda, Toyota and Suzuki have been operating for decades and have localisation too, one can't undermine the effort and investment that would be potentially put in by the local partners (Nishat and Lucky) who are really good at doing their job".
Keeping that in mind, Pakistan Suzuki (PSMC) announced that it is gearing to invest up to $600 million in the sector in a new plant and bring on a new fleet if the government gives incentives to them. Perhaps they are still in negotiation phase but it is a start, and the need of an hour. The company only a few weeks ago introduced Ciaz to the market-in competition with Corolla. There is a lot of mobility right now and INDU will have to up its game also.
The interesting bit in all this is that-as we have observed-while smaller cars will get traction in the future as urbanisation expands and income levels rise; the high-end Sedans will also see increased growth. At higher income levels, the 1300cc and above category of cars always gain more popularity. Since most of the new brands are expected to bring cars in this category-from Renault to KA-where Honda's two variants and Toyota's Corolla also operate; the competition will be extremely fierce in this segment, than others. For now, the grapevine is silent on INDU's latest plans. Here's hoping the company has something exciting up its sleeve in the near future.
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PATTERN OF SHAREHOLDING FOR THE YEAR ENDING JUNE 2016 Shares %
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Foreign companies and investors
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Overseas Pakistan Investors AG 27,382,730.0 35%
Toyota Motor Corporation 19,650,000.0 25%
Toyota Tsusho Corporation 9,825,000.0 13%
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Associated Companies
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Thal Limited 4,890,000.0 6%
Individuals 5,294,967.0 6.74%
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Source: Company Accounts
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INDUS MOTOR COMPANY 1HYFY17
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Rs (mn) 1HYFY17 1HYFY16 YoY
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Sales 51,399.70 51,333.91 0.1%
Cost of Sales 42,524.55 42,889.66 -0.9%
Gross Profit 8,875.14 8,444.24 5.1%
Distribution expenses 494.13 369.72 33.6%
Administrative expenses 450.59 409.10 10.1%
Other operating expenses 34.34 31.79 8.0%
Finance cost 117.96 39.90 195.7%
Other income 1,624.23 1,574.86 3.1%
Profit before tax 8,753.59 8,514.46 2.8%
Taxation 2,679.00 2,619.60 2.3%
Net profit for the period 6,074.59 5,894.86 3.0%
Earnings per share (Rs) 77.28 75.00 3.0%
GP margin 17% 16%
NP margin 12% 11%
Toyota Corolla (units) 25,768 27,681 -6.9%
Toyota Fortuner (units) 205 282 -27.3%
Toyota Hilux (units) 2,533 2,518 0.6%
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Source: PSX notice/PAMA
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