Equity Analysis /

Pakistan Autos: High prices/FED continue to dent auto volumes

    Ahmed Raza
    Ahmed Raza

    Investment Analyst

    Intermarket Securities
    13 June 2019

    Pakistan’s Auto industry sold 17,874 units in May’19, down 18%yoy/8%mom, taking the 11MFY19 volumes to 223,070 units, down 7%yoy. While inflationary pressure is the fundamental reason behind depressed numbers, 10% federal excise duty (FED) on cars above 1,700cc has disproportionately placed the tax burden on such cars, leading to sharpest decline in HCAR’s sales. Seasonal factors may also have resulted in lower volumes as unit sales declined by 8%mom in May’19 (volumes declined by 15%mom in Jun’18 during the month of Ramadan)

    Volumes of Honda Atlas Cars (HCAR) plunged by 31%yoy in May’19, the most among peers, repeating the pattern in Apr’19 due to FED impact. However, volumes are up 4% on a monthly basis. Pak Suzuki (PSMC) sold 10,066 units, down 14%yoy where weak economic growth is taking a toll on its commercial vehicles segment (Ravi and Bolan down 32% and 24% yoy, respectively, during May’19). Mehran volumes were also down by 50%yoy as the model is being phased out while its replacement, Alto, will be out this month. Excluding Mehran, the passenger vehicle segment grew by 26%yoy, suggesting consumer demand is still holding up. Indus Motors (INDU) saw a 20% yoy reduction in its unit sales during May’19, where major decline emanated from Fortuner/Hilux.

    Tractor volumes declined by an alarming 47%yoy to 3,599 units in May’19 on account of weak agricultural fundamentals and slowdown in construction activity. However, the Ramadan factor is also in play in here (in previous Ramadan, volumes declined by 42% on a monthly basis in Jun’18 compared to 34% monthly decline in May’19).

    FY20 Budget rationalized the FED structure, where cars below 1,000cc engine will now face 2.5% duty, between 1,000cc to 2,000cc will bear a 5% charge, and those with engine size above 2,000cc size will be charged at 10%. This is a negative measure overall and will further add to demand woes, but HCAR’s products will not face a disproportionately higher tax as the budget normalizes the price differential between Civic (1,800cc) and 1,300cc cars. Note that HCAR sells 40% of its cars in the above-1,700cc category, compared to 15% for INDU. Another budgetary implication for the sector is higher minimum tax on turnover (1.50% from FY20 compared to 1.25% earlier). Due to thinner margins, PSMC is already falling under minimum tax and this measure will aggravate its tax liability. Given a weak demand picture, we maintain our marketweight stance on the sector. We highlight that the sector is yet to pass on the impact of recent PKR depreciation of 7% since May’19.

    Risks: (i) PKR depreciation against Yen and US$, (ii) adverse regulatory measures and (iii) entry of new competitors.