Indus Motors on the path to recovery

It seems that Indus Motors is seeing a small renaissance of sorts. In an environment where the auto sector is seeing a constant decline, Indus Motors is seeing a turn in its fortunes. This turn is coming in two major avenues. First of all, the company has seen its results take a turn for the better based on its half yearly accounts and the company has announced an investment of Rs 3 billion. These two events show that the company is turning a corner and this year can see it gain some of the ground it had lost.

Financial Performance

At the end of June 30th 2023, the company announced an earning per share of Rs. 123 which was its second worst year since 2018. The only year the company saw lower profits was during 2020 due to the pandemic. The company sold only 31,500 units for the year compared to nearly 76,000 a year before that.

In terms of its revenues, the company registered sales of Rs. 177 billion which were 35% lower than a year before of Rs. 276 billion. Similarly, its profit after tax was only Rs 10 billion for the year where it had been Rs. 16 billion in 2022. Its return on equity (ROE) was only 16% in 2023 compared to 29% in 2022. This was only the second time that its ROE had fallen below 25% in the last 6 years.

The primary reason for the bad financial performance was based on the lower sales and revenue that the company made during the period. Gross margin for the company was already on a downward trend due to the rising direct costs and 2023 saw the ratio fall to 4.4% when it was around 6% in 2022. The rise in its direct costs was caused by supply chain issues and was having an impact on the bottom line of the company.

With indirect operating expenses being similar to the ones last year, the company was only able to earn operating profits of R. 3.4 billion which had been Rs. 13.8 billion in 2022. This was a sharp fall of 75% which was caused due to fall in sales. The company was able to see some rise in other income leading to its profit after taxation jumping to Rs. 9.7 billion compared to Rs. 15.8 billion last year. This led to its earning per share dropping from Rs. 201 per share to Rs. 123 per share in 2023 which was a fall of nearly 39%.

In the backdrop of such dismal performance, it seems that the company is improving based on the half year results from this year. The company saw improvement in its earnings per share last quarter where the company earned Rs. 41 per share compared to Rs. 16.5 for the same period last year. The reason behind this was that cost of sales were actually greater than sales last year in the same quarter which led to a gross loss last year. This year, the same period saw a gross profit which was due to stable currency seen from June 2023 to September 2023. The same phenomenon has continued into the half year performance. The company saw its quarter gross loss of Rs. 0.5 billion turn into a profit of Rs. 1.4 billion for the period from October 2023 to December 2023. Even though indirect operating costs have been higher this quarter, the company has shrunk its loss from operations from Rs 1.4 billion last year to break even this year for the same quarter. Other income has been one of the biggest contributors to the income earned and has seen earning per share for the quarter jump to Rs. 22 per share which was Rs. 17 per share for this quarter.

The improving performance has been reflected in the half year results as well. The half year has seen a gross profit of Rs. 4.7 billion from a gross loss of Rs. 2.8 billion last year for the same period. Similarly, the indirect operating costs have been similar leading to a profit from operations of Rs. 2.1 billion which was a loss of Rs. 4.7 billion last year. Once other income is considered, the company saw its earning per share go from Rs. 33 per share to Rs. 63 per share which shows an almost doubling of its profits.

One caveat that needs to be mentioned here is that a large chunk of income for the company is not coming from its operations but from other income. Other income accounts for Rs 5 billion whereas Rs. 2 billion is from operating income. The other income Indus Motors is earning is dividend, capital gains and markup from some of the investments that it has made so the improvement in performance is not solely under the control of the company. However, it still needs to be seen that the company has started to make profits under many of the headers it was making a loss in which shows that the company has seen an end to rising cost of raw material once the currency has stabilized.

New investment being announced

In addition to the improvement in its operating performance, the company has also announced to the stock exchange that the company has approved an investment of around Rs. 3 billion which will be made by the company in the coming years. The investment is part of the initiative taken by the company where it is looking for additional localization of parts and components that it uses for its existing vehicles.

Indus Motors has looked to increase the localization of the parts that it uses and encourages these parts to be manufactured locally in order to reduce its cost and weight on the foreign exchange reserves. This also proves to be beneficial for the local auto sector of the country. The company will look to invest in plant and machinery, dies, equipment and molds which will help the company in achieving localization. The investment is expected to be completed by the third quarter of 2025.

The decision taken by the company is based on improving its profitability and developing a stream of locally produced parts as the last few years the company has suffered from the ban on imports from outside the country. The last year saw the government ban imports which meant many parts that were used by the company were not being imported which also led to its plant being shut down in the past. By being able to manufacture its parts locally, the company will also make sure that any such shutdowns caused by non-availability of parts can be avoided.