The recent hike in excise duty coupled with the Value Added Tax (VAT) hike will have a considerable impact on vehicle sales volume of United Motors Lanka PLC (UML) projected to fall by 20% YoY during FY 2017E, resulting in the segment’s revenue to drop 10.6% YoY to LKR 11.04bn, a new Securities Research report has indicated. According to a report by Bartleet Religare Securities (Pvt) Ltd, the growth in the spare parts segment on the other hand, would push the profit margins, allowing the Earnings Per Share to recover in FY 2018E and FY 2019E to LKR 16.39 and LKR 19.77 respectively.

“The 226 basis point increase in the risk free rate since our last review coupled with a 240% rise in net borrowings hurt our DCF valuations, resulting in a total return of LKR 93 (+5.2 on CMP) inclusive of a dividend of LKR 6.50. We downgrade to HOLD,” the broker firm’s report stated.

It noted that vehicle segment’s performance during Q4 FY 16, amidst ad-hoc changes in the government policies and taxations, aided the group to report a net turnover of Rs. 3.59bn for the quarter (+32% YoY).

The segment grew 35.7% YoY to record LKR 2.83bn for the quarter, contributing ~79% to the group top line. We believe that the excise duty hike which was executed towards the end of May would have a ~40% price impact on UML, thus hurting the volumes throughout FY 2017E.

“The high end Montero’s tax component will increase by about LKR 10mn, but the distribution of permits is expected to neutralise the volume impact. We believe that the loosening of policies once the BoP issues are addressed, would aid the vehicles segment to recover in FY 2019E, growing 12.9% YoY to LKR 12.6bn,” the research report opined.