Equity Analysis /

Pakistan Autos: Q1 FY 20 preview – Heavy volume decline to compress earnings

    Ahmed Raza
    Ahmed Raza

    Investment Analyst

    Intermarket Securities
    22 October 2019
    • We expect the IMS Auto universe to record Q1 FY 20 profits of about PKR1,655mn, down 64% yoy and 48% qoq due to 41% yoy and 28% qoq volume decline during the quarter.
    • Gross margins, however, may gradually inch up as OEMs completely passed on the impact of higher PKR, increased custom duties and revised FED structure from Jul’19.
    • We currently have a Marketweight stance on the sector as we see lower sales until Dec’19. Recovery from next year may also be moderate due to higher taxes on the sector. Weak results, however, may open up attractive entry points.

    Volume decline to hurt earnings despite stable gross margin

    Pakistan Auto sales declined by 37% yoy to 34,628 units during Q1 FY 20 as economic slowdown, higher prices and the documentation drive in the economy took a heavy toll on demand. To recall, the FY 20 budget increased taxation measure on OEMs via higher custom duties and revised FED. This will be reflected in Jul-Sep’19 results, where we expect profits of PKR1,655mn for the sector, down 41% yoy and 28% qoq. 

    Pak Suzuki Motor Company (PSMC) will remain in the red in Q3 CY 19, but the losses will be lower than previous quarter as we expect gross margins to improve 3.5ppts on a sequential basis. PSMC’s price increases were the highest in the sector during the quarter while all of its models, excluding Swift, faced the lowest rate of FED (2.5%). We are not incorporating turnover tax for Q3 CY 19 taking cue from previous quarter as we understand that the company expects to come out of the minimum tax regime by year end. Honda Atlas Cars’ (HCAR) NPAT is also expected to improve sequentially in Q2 MY 19 due to the absence of FX losses (PKR appreciated slightly against US$ during the quarter) despite lower sales. Major decline in the sector will emanate from Indus Motors (INDU), in our view. In addition to lower sales, we see decline in other income too as customer advances have declined significantly (down 15% qoq as per Jun’19 accounts). We expect INDU to announce first interim DPS of PKR12.5.

    Tractor sales were also depressed, but AGTL may show growth 

    In Q3 FY 20, tractor sales declined to 9,395 units, down 32% yoy due to slow agricultural growth and higher farm input prices. Al-Ghazi Tractors (AGTL; unit sales up 24% yoy) outperformed its peer Millat Tractors (MTL; unit sales down 52% yoy). AGTL will be the only company to post yoy growth (NPAT expected up 68% yoy) in the auto space. Gross margins of tractor companies have been mostly resilient due to higher localisation and timely price increases, where we expect the trend to continue. We do not expect the two tractor companies to announce dividends for this quarter. 

    Recovery in sales will likely be slow

    Auto sales are likely to stay subdued until Dec’19 due to economic challenges and buyers deferring purchases to the next calendar year (as it will command a higher resale value). Moreover, HCAR and INDU are observing non-production days in Oct’19 as well, citing weak demand and inventory buildup. We expect recovery from Jan’20, but the pace will likely be slow due to heavy taxation burden on the sector. However, weak results may open up attractive entry points, in our view.

    Risks: (i) PKR depreciation against USD, (ii) adverse regulatory measures, and (iii) model launches by new players.