Latest automobile sales numbers showed a positive MoM growth of 36%. Sales were down by 2% on a YoY basis. Production numbers maintained their positive momentum growing by 37% MoM to 18,391 units. This is an encouraging sign, especially considering the tough macro-environment the automakers are currently facing, with elevated interest rates, PKR volatility and import curtailment measures on CKD imports. While the numbers are encouraging persistent deterioration in Pakistan’s economic indicators carries challenges for the sector. We continue to remain Marketweight on the sector, with a preference for INDU.
While the sector continues to show signs of recovery, if we look at 5MFY23 production is down by 36% YoY and sales are down by 39% YoY. We believe the prevailing CKD import curbs will continue to plague the production of vehicles in the immediate future. Nevertheless, automakers decision to resume operations has started to pay off, leading to sequentially improvement.
Margins for automakers are likely to remain under pressure due to phased price hikes, PKR volatility, and lower production in our view. Further import curbs may also be expected in the next few months in order to conserve foreign exchange. In such a situation the auto sector will be particularly vulnerable.
PSMC has performed particularly well, growing sales by 55% MoM. Except for Cultus and Wagon R, all models have witnessed massive volumetric growth on a MoM basis. The sequential rise in demand has helped the company to expand its market to 67% in Nov’22 from 59% in the Oct’22.
Nov'22 did not turn out well for tractor sales after a promising performance last month. Sales were down 34% MoM basis with AGTL suffering a sharp 65% decline MoM. The Government's announcement of reducing duties on imported tractors is expected to increase competition and subdue sales growth in the coming few months.
Supply side issues are likely to persist in the coming few months, owing to the sluggish release of CKD kits, necessitated by the need to ease pressure on both the PKR and foreign exchange reserve. Demand outlook also does not seem promising either with i) further hikes in interest rates likely to suppress auto-financing and, ii) weakening of rupee coupled with rapid inflation hurting the purchasing power consumers. We continue to remain Marketweight, despite the underperformance of the IMS Auto sector. Selectively, we have a preference for INDU (TP of PKR1,280/sh).