Indus Motors: We see decent near-term earnings growth on account of higher than expected sales and healthy margins, but see emerging threat on the margins as Yen strengthens against the Rupee. Furthermore, fading new Corolla novelty and reduced farmer income should also dampen the volumetric sales going forward. We retain ‘Neutral’ stance on the stock and advice investors for better entry points for fresh accumulation.

Reverse currency trends to adversely affect margins: Where favorable movement in RsJPY parity previously propelled INDU to record high margins, it is now being threatened by reverse trends. Patchy global economic outlook has increased demand of JPY despite negative interest in Japan. So far in 3QFY16, the Yen has appreciated against the Rs by ~7% versus ~4% in 1HFY16 indicating pressure to come on the margins in the days ahead (see Fig 1 for historical precedence). Incorporating the same, we expect gross margins of 15.1%/13.1%/12.6% in FY16/17/18 (versus 14.8%/16.9% in FY15/1QFY16).

Volumes to float towards normalized levels: Besides, we alter our volume forecast with capacity as a major constraining factor. Though increase in consumer financing is a positive but the impact is to be diluted by lower demand from Agri sector and fading of new Corolla novelty. Our projection reflects 13% YoY increase in the volumes in FY16, followed by 8%/4% decline in FY17/18. Reduced product sales and lower interest rates should also weigh heavily on the other income, in our view. We have reduced the other income contribution to PBT from 21%/18% in FY15/16 to 12%/11% in FY17/18.


By: Foundation Securities Limited