For Jun’22 results, we expect IMS Auto Universe to post combined net profit of PKR1.4bn, down by a sharp c.75% YoY owing to sequentially trimmed margins and imposition of budgetary measures.
On a YoY basis, volumes rose by a strong c.60% on account of preemptive buying in anticipation of price hikes, long delivery lead time owing to production constraints and bookings from relatively low interest rates. Despite the surge in volumes, margins are likely to come off.
The higher interest rate environment, compounded by the ongoing production constraints, will lower demand in FY23 by 20-30%, in our view. We prefer INDU (TP PKR1,416/sh) as our top pick in the sector.
Earnings to fall despite robust revenue growth
During the quarter, Auto industry sales surged c.60% YoY, largely led by Pak Suzuki Motors (PSMC) which recorded highest quarterly sales, due to i) strong uptick in demand likely due to preemptive buying in anticipation of price hikes and, ii) consequent long delivery lead times. A noteworthy observation is that the cars are likely to have been booked during Dec’21-Feb’22. For Honda Atlas Cars (HCAR), launch of new Civic and smoother production of City, led to high volumetric sales. We thus expect industry revenue to clock in at c.PKR65.7bn, up a sharp c.25% YoY (+5% QoQ). However, despite the strong revenue growth, industry NPAT is expected to fall c.15% YoY to PKR5.2bn. The decline in NPAT is largely due to a decrease in gross margins on account of i) elevated input costs, and ii) c.20% YoY PKR/USD devaluation.
Margins will compress further in the absence of price hikes
Despite the sharp rise in volumes, margins are likely to decrease c.4ppt YoY to c.5% (nearly flat QoQ), because of sharp PKR depreciation against the USD, elevated commodity prices and shipping freight. We expect the margin attrition to be the most for INDU, as both PSMC and HCAR recently launched relatively higher priced new cars which is likely to cushion margins. To recall, the OEMs had increased prices twice between Mar-May’22, which would be effective from Jul’22. As for PSMC, the price hike in Jan’22 is likely to have been translated in this quarter. Looking ahead, long delivery lead times (of at least 4months), will continue to prevail owed to long approval queues for approval of LC’s for part imports. This, coupled with closure of car bookings (since May’22) and administrative and monetary measures to restrict demand will lead to sales attrition in FY23. We believe, most automobile players will increase prices further to cushion margins in the coming quarters.
Tractors: Divergent trend in earnings
The IMS Tractor Universe is expected to post a combined net profit of PKR2.2bn, down 10% YoY, largely due to imposition of supertax and poverty alleviation tax in the budget. Al-Ghazi Tractors (AGTL) is expected to outperform Millat Tractors (MTL) once again, owed to sharp 25% YoY growth in sales. Multiple price hikes since March, will likely keep margins healthy.
Prefer INDU while remaining Marketweight on the sector
With the tightening on both fiscal and monetary fronts, we expect a slowdown in volumetric growth from 2QFY23. The recent increase in interest rates and upcoming price hikes are likely to dampen sales growth. These, compounded with the increase in taxes (CVT and WHT) in Budget FY23, will further slowdown sales. We, therefore, remain Marketweight on the Automobile sector with a preference of INDU (TP PKR1,416/sh) as our top pick.