Pakistan’s auto industry sold 17,561 units in June, down 5% yoy/2% mom, taking FY 19 volumes to 240,631 units (down 7% yoy). The decline is only moderate compared with recent trends (H2 FY 19 volumes down by 11% yoy) as we suspect preemptive buying ahead of higher prices/new duties in July. The recent results were supported by a new model in 660cc category, the Suzuki Alto, which made an impressive start despite a tough macroeconomic backdrop.
Indus Motors (INDU) back on growth trajectory with 18% yoy growth, according to June sales data. A major push came from Corolla sales, up by 24% yoy in June, which accounts for 87% of unit sales. Honda Atlas (HCAR) lagged behind with 29% yoy drop in volumes due to FED on the Civic. Unit sales of Pak Suzuki (PSMC) also dipped by 8% yoy majorly due to Mehran phase-out (down 67% yoy). Wagon-R sales were down 2% yoy compared with 10% yoy growth in H2 FY 19, likely due to the launch of Alto. In June, the price gap between highest grade of Alto and lowest grade of Wagon-R was negligible, but has now widened to 20%.
Tractor volumes declined by 7%yoy to 3,634 units. The decline was less severe than in previous months, mainly due to seasonality factor and 16% yoy growth in Millat Tractor's (MTL) volumes. In FY 19, tractor sales declined by 29% yoy to 50,405 units as agricultural growth remained under pressure due to water availability issues and absence of subsidy schemes.
From July, cars will be expensive by 15% on an average as OEMs have passed on the impact of PKR depreciation against the US$ during Q4 FY 19 (12%) and revised FED (2.5%/5.0%/7.5% on >1,000cc/1,000-2,000cc/<2,000cc engine size). Additionally, Kia will start rolling out cars from its new plant in August. We think these developments will result in sharper volume decline from July onwards. An additional concern is higher minimum tax on revenue basis (increased from 1.25% to 1.50% in the FY 20 budget), which is already hurting PSMC, but may impact HCAR too, in our view. As a result, we have an Underweight stance on the auto sector.