Equity Analysis /

Pakistan Autos: Feb’23 - Prolonged raw material shortage further reduces volumes

  • Auto industry sales continued to remain under pressure and further declined by massive 45% MoM and 44% YoY.

  • PSMC has posted the lowest volumetric sales since April 2020. The company only sold 978 units in Feb’23.

  • Auto Sector is likely to continue facing strong headwinds due to restrictions on CKD kit imports.

Intermarket Securities
13 March 2023

Pakistan Auto industry sales continued to remain under pressure, declining by 45% MoM and 44% YoY to just 5,762 units in February 2023.  This is due to (i) the government’s administrative measures to curb luxury goods imports, (ii) slower demand growth amid elevated interest rates, (iii) lower purchasing power amid multi-decades high inflation, and (iv) sharp hike in local car prices following PKR devaluation and increase in taxes, leading to a contraction in local production and demand.

  • INDU sales were down 61% YoY / 49% MoM, where all variants have witnessed a major fall in production and sales volumes. Sales for premium segment (Hilux and Fortuner) fell by 62% MoM. This is usually the segment which is less affected by higher inflation and interest rates, where we think the sharp hike in car prices is now having an impact. Corolla and Yaris volumes fell by 37% MoM, while production fell by 66%. These numbers are likely to persist for the remaining part of FY23 as the industry faces shortage of raw materials amid import restrictions.

  • PSMC has posted the lowest volumetric sales since April 2020 (Covid-19 levels) at only 978 units in February 2023, down an incredible 92% YoY / 67% MoM. Only 600 Altos were produced in the last two months versus a monthly average of c.4600 in 1HFY23. Other variants also witnessed a significant production decline of 63% in the last two months compared with monthly average numbers of 1HFY23. Lower production has reduced sales volumes of the company. However, going forward once import restriction ease off, we believe that the demand of PSMC vehicles may bounce back quicker than others as the government has recently imposed additional GST on 1,400cc and above locally assembled vehicles.

  • In line with other two assemblers HCAR volumes also declined by 40%YoY / 39% MoM to 1,636 units in February. However, production remained relatively flat on a sequential basis at 2,112 units. The recent increase in prices coupled with elevated interest rates have started hampering HCAR sales and the impact may linger. 

  • Tractor industry recorded sales of c.3,300 units, down mere a 2% MoM basis. MTL sold 2,602 units and was able to maintain its dominance. AGTL only sold 728 tractors, depicting a decline of 65%YoY / 39% MoM. MTL was able to increase its production by c.56% MoM to c.2,500 units. We expect tractor sales to remain firm compared to passenger car sales, aided by greater localization. 

Going forward, we believe that even if the parts imports situation normalizes, local passenger car sales may take time to fully recover as demand is likely to remain weak following the sharp hike in car prices, increase in GST to 25% from 18% on 1400cc and above vehicles, and overall reduction in purchasing power amid a difficult macroeconomic environment. Out of the big three, PSMC seems to be well positioned due to its presence in entry level cars, fuel efficiency and lower taxation rates. Apart from this, INDU’s higher cash balances and revival of margins post recent prices hike should support earnings. We have a Marketweight stance on the Auto and Tractor sectors, and prefer INDU (TP of PKR1,270/sh) and MTL (TP of PKR665/sh) as our top picks.