Equity Analysis /
Pakistan

Pakistan Auto Sales: Admin measures continue to curtail demand in August

  • Automobile sales in Aug’22 indicate another slump in demand, continuing its downwards trajectory from the previous month

  • PSMC witnessed the largest decline in sales due to plant shutdowns; MTL outperformed peers in the tractor space

  • FY23 will be challenging amid both demand and supply-side concerns. We continue to prefer INDU (TP of PKR1,416/sh)

Intermarket Securities
13 September 2022

Latest automobile sales print indicates another sharp slump in demand of 46% YoY (down a further 2% MoM) to c.11,650 units, continuing its trajectory from the previous month that is similar to pandemic lockdown in Jun’20, largely owed to production constraints. The ongoing auto-parts import curtailment measures taken by the SBP, coupled with recent floods impacting supply has led to the decline in production during Aug’22. Also, high interest rates, PKR volatility, potential further price hikes and production constraints will continue to add to the sector’s misery in FY23. We continue to remain Marketweight on the sector, with a preference for INDU owed to ability to payout healthy dividends due to balance sheet strength, lower reliability on auto-financing, and HEV segment plans.

  • The ongoing restrictions on the import of auto-parts by the SBP, continued to be the major reason behind the sharp decline in sales during Aug’22, led by the plant shutdowns by both PSMC and INDU. The plant shutdowns continued in Sep’22 as well, since the OEMs struggled with auto-part’s supplies. PSMC witnessed the sharpest decline in sales (67% YoY), below the 4,000 units level for the first time since Aug’20.  

  • Despite the resumption of the IMF program and inflow of c.USD1.1bn, production is likely to remain constrained in the coming months amid import restrictions and recent announcement of potential measures to be taken, in order to stabilize the PKR. Hence, the companies are likely to continue operating on single-shift production in the near-term. 

  • Although the automobile OEMs announced price reductions of around 5-7% during the month amid PKR appreciation to around the PKR210 level, the industry is likely to witness another round of price hikes soon. We highlight that the PKR has slipped continuously for over a week, closing above PKR230 today. Margins are likely to be under pressure in 1HFY23, owing to lower production and PKR slippage, in our view.         

  • On the flip side, tractor sales witnessed a divergent trend, increasing both YoY and MoM to c.4,000 unit, with MTL outperforming AGTL. However, the devastation caused by the recent floods is likely to hamper tractor sales in FY23 (pressure on farmer income). MTL also announced a plant closure for the first two weeks of Sep’22, owing to delivery concerns.

Moving forward we expect industry sales to continue the downward trend, owed to i) reduction in auto-financing underpinned by increase in interest rates, ii) overall slowdown in demand due to decrease in purchasing power amid inflationary pressures and price hikes, and iii) ongoing production concerns to further exacerbate delays in car deliveries. We therefore continue to remain Marketweight, with a preference for INDU (TP of PKR1,416/sh).