By: Foundation Securities Limited
Indus Motors Limited: Where we see currency dynamics and better acceptability of new Corolla to remain favorable in the ongoing year, we see the erosion of the same to weaken company’s profitability beyond FY16. While we have raised our FY16 earnings estimates by 6% on the back of revised JPY/US$ (in line with our JV partners Macquarie Capital), we have also revised down our volumetric assumption for FY17-18E. Besides, we have also rolled forward our valuation to June-16. With our June-16 TP at Rs1,367.7/sh, the scrip offers an upside of 26%, and thus we upgrade our stance on it to Outperform from Neutral. Recent weakness in price justifies our stance upgrade.
Favorable currency dynamics to support earnings in FY16: We revise upward our FY16E earnings estimates for INDU by 6% following incorporation of revised JPY/US$ parity in line with our JV partners Macquarie Capital (up 4%), and strong volumetric growth. We also revise down our steel price assumption by an average of 13% for FY16-18E. Where the said developments look favorable for the company’s margins, Rupee weakening against US$ may call for a price hike to sustain them at current levels, in our view.
Where favorable macro outlook in the backdrop of lower interest rates and increased consumer financing look poised to increase the market size, release of a new variant by a competitor in near future may lure customers away from the new Corolla model. Based on this, we have pared down our volumetric assumption FY17E onwards by ~4%, and subsequently trim our FY17/18E estimates by 5%.