AgriAuto Industries: Gearing up for Next Bull Cycle

Rebound in economic activity will drive a strong recovery for AGIL next fiscal Year

We initiate our Independent coverage of Agriautos industries Limited (AGIL), the share is currently trading at a huge discount to its fair value (upside 54%).

AGIL can gain significant upside as the stock has been trading at a forward P/E of 5.2x against KSE-100 P/E of 8.2x and regional peers P/E of 16x. Moreover, the stock has been trading at a steep discount of 30% against its Auto Sector peers P/E of 7.8x.

The company operates in two segments which include manufacturing/sale of automotive components and stamping of sheet metal parts through its subsidiary.

Some key Developments

• The company has been increasing its inventory on the back of Large Order book. At March-2021 end, AGIL had an inventory of ~Rs1.6bn which is one of the peak levels. Lower sales in 2020 had led to higher inventory levels. However, with new models getting traction, the company has geared up its Inventory to service the market on time. Inventories will witness fast Liquidation from 4Q and onwards backed by hefty demand kicking in.
• The company’s cash flows are expected to ease down given bumper sales from 4Q2021 onwards.
• The majority of the company’s sales are to its group company, Indus Motor Company (INDU), and other OEMs such as Pak Suzuki (PSMC) and Honda Atlas Cars (HCAR). Tractors constitute a very small percentage of its revenues (around 5% at present).
• The company has been continuously making some minor capacity additions in new presses and Paint plants (average Capex Rs.350mn/year) to cater specially to new Models. The company also successfully commissioned solar energy set up last year which will lead to Annual savings of Roughly Rs. 25mn (Rs 0.8/share).
• As per some sources, AGIL has successfully negotiated with Honda for the supply of parts for the new City model (6th Generation). This alone has the potential to increase revenue anywhere from Rs.500mn to Rs.1,000mn depending on the sales momentum of the new model.
• Toyota Yaris Sales are likely to average 3,000 to 3,5000 units a month from July’21 and onwards as Record Bank Financing, Optimum Price Point, ready availability, and steady acceptance will provide the boost. This is expected to have a multifold impact on AGIL.
• Replacement demand, impacted by the lockdowns and restricted movement, to post robust recovery

Financial Impact

Driven by a faster recovery in the production of vehicles in Pakistan, AgriAutos Ltd – one of Pakistan’s leading automotive component manufacturers – posted a sharp rebound in net profit and revenues for the March quarter, indicating a strong recovery in operations to the pre-Covid level.

AGIL reported a 167% increase in consolidated Net Profit for the quarter ending March-2021, as vehicle production exceeded the Pre-COVID level.

Vehicle manufacturing in Pakistan improved sharply during the quarter as Original Equipment Manufacturers (OEMs) increased production to replenish stocks at dealerships as retail demand surpassed the supply of vehicles.

AGIL revived its profitability, after enduring subdued performance in FY2020 due to the stringent lockdown measures and demand slowdown.

Due to recovery in Auto Sector, the revenue from operations during the quarter improved by 58% year on year to Rs 3.075bn. The operating profit also jumped by a massive 234% to Rs. 407.9mn due to the overall improvement in sales and cost-cutting measures taken by the company.

As a result performance in 3QFY21 remained above all estimates where Earnings Per share for the quarter stood at Rs. 9.12 (highest ever quarterly earning).

Future Outlook

Auto Sector is all set to witness the next Bull cycle starting from FY2022. Reduction in With Holding Tax and GST has led to Price reduction across the board ranging from Rs. 50,000 to Rs. 225,000.

Moreover, anticipated Car financing through Roshan Digital Accounts likely to add 11,000 to 22,000 units of additional car sales (Rs. 27bn to Rs. 55bn).

While the major boost is likely to come from proposed Subsidized Auto Loans from the Government (yet to be finalized), where the government is likely to provide subsidies in the form of reduced markup on select car models.

Overall, we expect Car Sales to close FY2021 with 150,000 units and Likely to reach 225,000 units in FY2022, the highest-ever level in history. The major beneficiary will be Auto Parts manufacturers catering to various brands. AGIL is all set to reap the benefit of higher car sales in FY2022. While Motor Bike sales increase and replacement market will also contribute to the sales momentum of the company going onwards.

AGIL posted record Consolidated sales of Rs. 3.075 billion in the March-2021 quarter backed by Bumper sales of Pak Suzuki and Atlas Honda and Indus Motors with Quarterly Earnings per share of 9.12.

Amid the availability of subsidized Auto Loans, the projected increase in car production seems very much achievable leading to higher sales for AGIL. Our draft estimates suggest AGIL is all set to post Quarterly Consolidated EPS of 13 to 15 in 1QFY22 and FY22 EPS ranging between 50 to 60. With this much earnings in sight, AGIL trades at a cheap multiple of ~5.2x

In the last bull run of the Auto sector (coinciding with the highest KSE100 index level of 53,000), AGIL had traded at PE multiples of ~20x reaching the highest price of 453/share. Being conservative, assigning a PE multiple of even 8x will lead to a significant upside to Rs. 440/share.

	FY21E	FY22E*	FY23E*
Earnings per Share (Rs.)	33	55	58
Dividend Pershare (Rs.)	14	22	24
PE(x)	8.79	5.27	5.00
Dividend Yield%	5%	8%	8%

Risks

Increasing demand with improving macroeconomic fundamentals may be diluted by production issues. While the shortage of semiconductors is prevailing in the industry, another issue of rubber shortage might be on the rise as well.

Moreover, Commodity bull run and currency depreciation may keep margins in check. However, as witnessed in past, AGIL has the negotiation ability to pass on the cost pressure to Car manufacturers.

Disclaimer: This is not a Buy or sell call. We are not a financial advisory firm and do not provide investment advice nor buy/sell recommendations. BusinessTribune will not accept any liability for loss or damage as a result of reliance on the information contained within this website. Readers are advised to do their own due diligence and consult a financial advisor before taking any decision