KARACHI, Feb 19: On Wednesday, Indus Motor Company Limited announced financial figures for the first half of the financial year 2004 (July-December 2003), posting 86 per cent surge in earnings to Rs778 million.

The board also declared interim cash dividend at 40 per cent, which was twice the interim payout made by the company at this time last year. But ordinary investors greeted the results with a tantalizing mixture of hope and apprehensions.

The uncertainty surrounding the government's potential plans of reducing tax rate on Completely Knocked Down (CKD) kits and on Completely Built Units (CBU) and permission for import of used/reconditioned cars has resulted in sharp drop in stock values of automobile assembling companies.

The market price of the share in Indus Motor closed at Rs106 on Wednesday, which represented drop of Rs12, following the federal cabinet's decision. On January 30, the stock was trading at Rs125.

All major stock brokerage houses came out with their comments on the half term numbers. Tanvir Abid, head of research at Jahangir Siddiqui Capital Markets (Pvt) Ltd, observed that the earnings growth had resulted from 64 per cent surge in sales, a two per cent increment in gross margins and a substantial 60 per cent decrease in financial charges.

The analyst noted that net sales amounted to Rs10.1 billion, up 64 per cent from Rs6.2 billion in the same period last year had ensued from a 55 per cent increase in sales volume to 12,775 units.

Decline in financial charges primarily resulted from decline in mark-up on advances from customers. Tanvir Abid pointed out that company's sales during January had shot up by 61 per cent.

Mohammed Sohail and Abdul Azeem, who follow the auto sector for brokerage Invest Capital & Securities, noted that compared to the first quarter of FY2004, profit was down 37 per cent from Rs451 million to Rs328 million, which was mainly attributed to low sales in the last part of 1HFY04 owing to Eid holidays and new year registration phenomenon. "Going forward, in 2HFY04, we expect earnings growth to continue due to advance booking of company's vehicles," said the InvestCap report.

Fariha Tayyeb, auto sector analyst at Capital One Equities, thought that the upsurge in sales during the first half was due to growing popularity of the Toyota Corolla, coupled with increasing sales of Hyundai Cuore.

The analyst commented that the government's decision to reduce tax rate on CKD and CBU was a positive steps as reduction in tax on CKD kits would improve gross margins for auto assemblers. Reduction on taxes on CBUs was also thought to be beneficial for the auto assemblers as they receive agency commission for any vehicle imported. But the import of reconditioned/second hand vehicles was looked upon as having potentially averse effect on the manufacturers.

Fauzan Abdullah, analyst at KASB Securities says he expected Indus Motor to actually report better results during 2HFY04, which is traditionally the sector's peak selling season.

So is the Indus Motor stock worth buying? KASB Securities advised "picking up a fundamentally strong stock at relatively cheap price". The stock is trading at slight discount to the projected price-to-earnings ratio of 5x.

Mohammad Fawad Khan, analyst at First Capital Equities wondered if the company would stick to its capital expenditure plan of Rs1.4 billion to install a separate assembly line. The analyst said that though the Indus stock was trading at PER of 4.88x and offering a dividend yield of 9.4 per cent, the stance had to be neutral due to uncertain auto sector outlook.

Capital One calculated that at current price the stock translated to PER multiple of 4.37 to 5.38x, which was far below the market p/e of 10x. It expected full year dividend yield to range between 7.54 to 9.42 per cent.

But Mohsin Ahsan, analyst at Global Securities, was quite convinced that the recent decisions by the government would weigh heavily on car sales. "Moreover, intensification on competition from imported cars post-January 2005 will hurt manufactured car sales in FY06, unless Pakistan is allowed extension in non-bound duty status under TRIMS," said the analyst.