For March 2022 results, we expect our Auto Universe to post combined net profits of PKR5.2bn, down by c.15% yoy and c.10% qoq – due to sequentially trimmed margins amid sharp PKR devaluation and elevated commodity prices.
On a yoy basis, volumes rose by a strong 25% on account of preemptive buying in anticipation of price hikes (first round of price hikes were initiated in November). Despite the surge in volumes, GMs are likely to come off compared with last year.
The higher interest rate environment, compounded by the ongoing production constraints, will lower demand in FY23, in our view. We prefer INDU (TP PKR1,416/sh) as our top pick in the sector.
Revenues to surge amid strong volumetric growth…
During the quarter, Auto industry sales surged c.25% yoy, led by both Pak Suzuki Motors (PSMC), and Honda Atlas Car (HCAR), due to (i) a strong uptick in demand likely due to preemptive buying in anticipation of price hikes and consequent long lead times, and (ii) launch of new City and Civic (towards the end of the quarter) in case of HCAR. Also, during the quarter Indus Motors (INDU) recorded its highest-ever monthly sales in March. We thus expect industry revenue to clock in at c.PKR65.7bn, up a sharp c.25% yoy (flat 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 amid (i) rising cost pressures because of elevated input prices, and (ii) c.10% yoy PKR/USD devaluation.
…but margins will compress further due to cost pressures
Despite the sharp yoy rise in volumes, margins are likely to decrease by an average 2.5ppt yoy (nearly flat qoq), because of sharp PKR depreciation against the USD, JPY and THB and elevated commodity & shipping costs. We expect the margin attrition for PSMC to be the most, as the price hikes in November are yet to be realized in the quarter, in our view. To recall, PSMC did not pass on the price increase to consumers that had fully paid for deliveries, diverging from the rest of the industry’s practice. Looking ahead, long lead times (of at least 4mths) will delay the impact of the present macroeconomic tightening on sales. However, prolonged global semiconductor chip issues and the resurgence of lockdowns in China may exacerbate the volumetric decline in FY23, in our view. We estimate that the March price hikes to positively impact margins from 1QFY23.
Tractors: Divergent trend in earnings
Tractor volumes were flat yoy at c.15,000 units, led by the c.35% yoy increase in sales for Al-Ghazi Tractors (AGTL). Millat Tractors (MTL) recorded a c.15% yoy decline in sales due to lower exports and plant shutdown, in our view. The recent price hike is likely to sustain margins around present levels.
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 1QFY23. The recent increase in interest rates and recent price hikes are likely to dampen sales growth, in our view, while further potential increase in taxes in the FY23 Budget cannot be ruled out. We therefore remain Marketweight on the Auto OEM sector – preferring only INDU (TP PKR1,416/sh) as our top pick.