Equity Analysis /
Pakistan

Pakistan Autos: Highest sales slump since May 2020; FY 23 a challenging year   

  • Automobile industry witnessed the sharpest decline in sales since Jun’20, owed to production constraints

  • INDU witnessed the largest decline in sales (65% YoY); AGTL continued to shine in the tractor space

  • Going forward, FY23 will be a challenging year for the industry amid both demand and supply-side concerns

Intermarket Securities
12 August 2022

Latest Automobile Industry demand figures indicate a sharp slump of 52% YoY (down 58% MoM) to c.11,900 units; steepest decline since the initial pandemic lockdown in Jun’20, owed to production constraints. Administrative measures to tame auto-part imports, monsoon and Eid holidays led to the decline in production during the month. Although import quotas will gradually ease-off, high interest rates, PKR volatility, price hikes and production constraints will continue to add to the sectors woes in the ongoing year. 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 greater rural exposure and HEV segment plans.

  • Restrictions on the import of auto-parts by the SBP was the major factor behind the sharp decline in sales during the month. During Jul’22, both INDU and PSMC announced non-production days, with an additional 2 weeks in Aug’22 by the former. Hence, INDU witnessed the sharpest decline in sales (65% YoY), below the 2,500 units level for the first time since lockdown.  

  • According to channel checks, production is likely to improve in the coming months due to easing off of import restrictions (greater quota) for Aug’22 and Sep’22. But, the companies are likely to revert to single-shift production due to inability to import required CKD kits (and other parts) and opening of LCs by banks. 

  • Another round of price hikes (averaging c.20% from May’22) was witnessed during the month, owed to the unprecedented 15% devaluation of Pak Rupee. This, coupled with lower utilization will pressure margins in the ongoing quarter, in our view, despite the multiple price hikes (May’22 price hikes will be effective from Jul’22 as well). Also, announcement of refunds by INDU is likely to impact profits in the coming quarters.        

  • Tractor sales witnessed a similar trend, with AGTL continuing to outperform MTL. We believe the reason for MTL’s underperformance is likely due to reduced operations as refunds continue to grow. Although the sector operates at a high localization level, supply chain constraints from vendors is likely to have attributed to the decline as well.

Moving forward we expect industry sales to decline by c.30% YoY, owed to i) steep reduction in auto-financing underpinned by increase in interest rates, ii) overall slowdown due to decrease in purchasing power amid inflationary pressures and multiple price hikes, and iii) ongoing production concerns leading to further delays in sales. We therefore continue to remain Marketweight, with a preference for INDU (TP of PKR1,416/sh), despite ongoing production concerns.