Pakistan’s auto industry sold 12,593 units in July, down 41% yoy/28% mom following a sharp price increase of 15%-20% (inclusive of the revised FED). We already suspected preemptive buying in June (when volumes declined by a moderate 5% yoy, which may have contributed to decline in July. On sequential basis, only Alto had higher unit sales in July, as it is a newly introduced model.
Volumes of Honda Atlas Cars (HCAR) declined the most in July (down 66% yoy) as higher interest rates impacted its customers more. Pak Suzuki (PSMC)’s unit sales declined by a less severe 23% yoy due to the Alto launch. But a 70% yoy drop in Wagon-R volumes suggests cannibalisation by Alto in the entry level cars segment. Indus Motors (INDU), which has been delivering growth until recently, also saw a decline of 56% yoy. The monthly decline of 55% for INDU is also the highest among peers, suggesting that plant maintenance during the month may have contributed to this.
Tractor volumes declined by 20% yoy to 3,089 units in July due to poor farmer economics and absence of subsidy schemes. PAMA reported 2/3 wheeler sales dropping by 27% yoy as an increase in petrol prices affectted this segment severely, in addition to higher bike prices.
This is the first month of such a sharp decline in auto sales. The extent of the decline exceeded our expectations. Note that H2 FY 19 saw the greatest quantum of macro adjustment (policy rate rose 225bps and PKR depreciated by 13.2%). Since August had fewer working days due to the Eid holiday (yoy sales would inevitably be steep), we wait until the end of quarter to ascertain if the July sales trend is the new normal. Nonetheless, we remain cautious on the sector with the only Buy on INDU (TP: PKR1,270/sh).
Risks: (i) PKR depreciation against Yen and US$, (ii) adverse regulatory measures and (iii) competition from new players.