Karachi, September 24, 2021 (PPI-OT): Pakistan Autos: Revisions in regulations

Local auto manufacturers have been increasingly halting new bookings with Kia motors being the latest inductee in the club, notifying dealers to draw down the booking for Picanto and Sportage. The semi-conductor chip shortage has been one of the factors cited for the change in operational dynamics of local OEMs.

Halt in new bookings also signals robust demand for new vehicles – strengthening prospects for the sector. This is also vetted by growth in auto sales jumping 93%YoY in 2MFY22 and auto loans hitting PkR326bn (+27% CYTD). We expect volumes to reflect low-altitude in the near term, only to recoup later as input shortage ease and business dynamics improve.

The govt. is considering increasing Regulatory Duty (RD) on imported CBUs from 15% to 50% to contain the massive increase in current account deficit while revised financing regulations have already been communicated by SBP. The revised regulations are likely to be positive for local OEMs with PSMC gaining the most given stronger competition from imported CBUs whereas sales in 1300CC+ premium segment are unlikely to be materially impacted.

While recent developments are likely to be margins decretive, OEMs with strong pipeline of new models (and a consequent gain in pricing power) and healthy cash flow profile are likely to fare better. In this backdrop, we continue have preference for INDU where our FY22TP stands at PkR1,774/sh.