United Motors revs up for FY13 with stellar first quarter

United Motors Lanka Plc (UML) posted a stellar first quarter with a 136% growth in profits to Rs. 969 million whilst sales rose by 67% to Rs. 6.2 billion in comparison to a year earlier.

“UML’s initiation into FY13 with high excise duties and exchange rates were overruled as it delivered the remaining 50% orders of permit holders who yield 100% margins with only local charges. Strategic pricing of its current portfolio of vehicles as it concentrates on the fast moving less costly vehicles now, has enabled to preserved its GP margin levels,” analysts at Softlogic Stockbrokers said.

Commenting on 1Q results, the broking firm said revenue grew by 67% though on a quarter-on-quarter (QoQ) basis there was a marginal dip.

Strategic pricing for ex-stock sales helped boost performance levels for UML. Gross profit margins improved by 558 bps YoY. A QoQ improvement in GP margins is also evident.

UML also saw operating costs rise by 68.7% year on year. A notable leap in UML’s cost base has been made since 3QFY12. Administration costs increased 73.3% YoY to Rs. 325.9 million in 1QFY13 but with a 16.8% QoQ dip being indicated. Distribution costs also took a similar pattern with a 50.8% YoY increase and 29.3% QoQ dip to Rs. 74.2 million following the Company’s recognition of warranty and free service charges on cash basis for vehicle sales made in Oct-Mar period. Operating profit margin improvement of

550bps has been mainly led by improved GP margins.

The Company’s EBIT improved by 133.6% to Rs. 1.32 billion with strong inflow from other income segment on account of dividend income from subsidiary firms.

“Despite the 1QFY13 being a rough quarter for motor business, UML managed to survive on its previous order books of permit holders,” Softlogic Stockbrokers said. Nevertheless it noted though UML reported sturdy profit figures for 1QFY13, the next quarters of FY13 is questionable.

The counter trades at a trailing PER of 2.4X Vs. the sector PER of 2.5X and trades below its book value at 0.7X trailing PBV.

Softlogic analysts said according to Motor Traffic Department of Sri Lanka, a total of 234,388 vehicles have been registered for 1H2012, which is down 6% YoY. Motor companies lost Year 2010 steam after vehicle sales jolted when the Government retraced its steps to again heighten excise duties on vehicle imports in March 2012. Buses, lorries and trucks however remained untouched. Situation worsened with a few other deleterious aspects smoking up.

Furthermore Sri Lanka currency depreciation during recent months has affected importers’ earnings in a big way. With import cost of vehicles being already increased with high tax levies, local currency devaluation has now been added to the additional cost estimation to weaken buying power of vehicle purchasers. Nearly 50% of new vehicle purchases are backed by leases. With the increased interest rates, cost of borrowing too had increased to narrow the need for new vehicle purchases.

UML has disclosed that motor cycle sales have already dipped from around 10,000 units to 6,000 after March 2012. However, TVS Lanka has continued to maintain its market share amidst slowing demand

Softlogic Stockbrokers also said present business environment for all motor sector players is challenging. UML draws its silver line to fill in the market gap for small commercial vehicles. Unimo Lokka, a small commercial truck specifically developed for Sri Lanka, has taken the key attention on this aspect. Due to a supply side deficit, this category proved to be under performed during 1QFY13. However, with the defect being resolved, UML targets to sell 100-150 units per month. Furthermore, UML also has sketched an aggressive marketing plan for locally assembled Nomad vehicles. The company finds obtaining approvals for registration of these vehicles a bottleneck.

Capitalising on its cash rich status, UML has taken to move to be white listed and to avoid finance cost burden in this high interest rate environment, Softlogic Stockbrokers said.