Equity Analysis /

Pakistan Autos – Premium category suffers most in Dec'19 amid economic downturn

    Intermarket Securities
    13 January 2020

    Pakistan's auto industry sold 12,103 units in Dec’19, up 23% mom, but down 38% yoy. This took CY 19 unit sales to 187,707 units, down 25% yoy. On a sequential basis, Pak Suzuki (PSMC) improved its sales, while sales of Honda Atlas (HCAR) and Indus Motors (INDU) declined further.

    PSMC’s sales increased by 49% mom to 8,732 units (although down 26% yoy), which brings the total sales for CY 19 to 111,543 (down 18% yoy). This was mainly driven by improved performance of Alto and Wagon R. Potential reason for the monthly recovery could be preemptive buying as PSMC had announced an increase in prices of about 4-5% in mid Dec’19, compared to HCAR and INDU which announced price increases of about 1-2% in early Jan’20. Volumes of the Sedan market declined on a monthly basis, possibly due to lower year-end sales, as cars with the latest model year fetch better replacement value.

    In CY 19, the imposition of higher FED rates a major reason for higher decline in premium category sales, while the economy segment benefitted from effective curbs on imported CBUs. Also, PSMC replaced Mehran, the second most-selling car in Pakistan, with Suzuki Alto, a 660cc car.

    Tractor sales saw a 35% yoy decline to 1,145 units in Dec’19 due to poor agricultural growth (issues with two major crops).

    While the new year effect may give a push to Jan’20 sales, we do not expect material recovery in H1 20. However, growth may resume beyond then due to accelerating GDP growth and declining interest rates, in our view. Within this backdrop, INDU is our top pick (Jun’20 TP: PKR1,373/sh) in the sector due to its strong brand image and possibility of new model launch (Toyota Yaris). We also like PSMC (TP: PKR265/sh) as it will continue to benefit from curbs on imported CBUs while multiple price hikes in H2 19 should lift margins in the coming quarters, in our view.