Equity Analysis /
Pakistan

Pakistan Autos: Prospects are weak; be selective

  • We downgrade our IMS Autos Universe estimates by an average c.5% amid cost escalations and macroeconomic weakness

  • Margins are likely to remain under pressure amid PKR slippage and lagged price increases, in our view

  • Despite downwards revision in estimates, INDU remains our top pick in the sector with a June 2023 TP of PKR1,455/sh

Abdul Ghani Mianoor
Intermarket Securities
1 April 2022
  • In spite of the robust sales growth in 8MFY22, we downgrade target prices for our Autos Universe further by an average c.5%, on account of cost escalations due to surge in commodity prices, higher freight due to supply chain disruptions and weakening macroeconomic outlook.    

  • Resurgence of supply disruptions following the Russia-Ukraine conflict has led to the use of costlier air shipments. Also, lagged price hikes will strain margins in the coming quarters, in our view. We cut our 2023-24f margins for the OEMs by an average c.1ppt.

  • In this current backdrop, we have a Buy rating only on INDU, with a rolled-over June 2023 TP of PKR1,455/sh, based on higher share of rural sales vs. peers, strong balance sheet and ongoing investment in the HEV segment. We maintain our Neutral rating on both HCAR and PSMC.

We prefer INDU only

We further downgrade the earnings estimates of our Auto Universe, in light of (i) the recent sharp PKR/USD depreciation (down c.14% FY22td), (ii) dampened demand outlook amid fiscal and monetary tightening which are yet to peak, (iii) resurgence of global supply-chain disruptions and commodity prices, and (iv) sharp price increases amid weak macroeconomic outlook. In spite of the earnings downgrade, we maintain our Buy rating on INDU (June 2023 TP of PKR1,455/sh), where our liking stems from: higher resilience due to healthy rural sales amid improving farmer income, balance sheet strength, lower contribution of auto-financing compared with peers – and all of these are complemented by the unique growth prospect from expansion into the HEV segment. We also maintain our Neutral ratings on both HCAR (March 2023 TP of PKR220/sh and PSMC (December 2022 TP of PKR235/sh), where lower localization levels for HCAR (especially assumed for new Civic) exposes its margins to PKR weakness to a greater extent, in our view; while PSMC’s margins are likely to contract further, as the price hikes in November were inadequate, while it has not yet increased prices again in CY22 so far (unlike peers which have).

Cut estimates as sales growth should slow down…

We cut our growth estimates by a further 2% (average) over the 2022-2025 period, largely due to an expected slowdown in industry sales (also according to channel checks), following both fiscal tightening (increase in FED and duties to dampen imports and restrictions on auto-finance) and monetary tightening (interest rates yet to peak). These, coupled with multiple price hikes during the year (in November 2021 and in March 2022) and uncertain macroeconomic outlook, are likely to weaken sales growth in 2HCY22, in our view. Whereas, the resurgence of container and part shortages (widening delivery times) will further strain production and in turn sales in the coming months, in our view. We understand that, athough there had been an improvement in global semiconductor chip availability, the decline in neon gas production in Ukraine is likely to worsen global supply of chips, in our view.

…and margins will remain stressed

Our FY23/24f EPS estimates are down by an average c.5%. The estimate revision largely emanates from an average c.1ppt decline in gross margins, due to (i) lagged price increases, (ii) elevated commodity prices, including that of steel, which are likely to remain elevated as per global experts, (iii) delays in shipping due to resurgence of container shortages amid freight volatility (air shipments on the rise) and (iv) greater penal payments to customers on car deliveries over two months. In light of the uncertain macroeconomic outlook, the Autos sector has declined 15% FY22td.