Karachi, September 30, 2021 (PPI-OT): Pakistan Auto: A paradigm shift in auto industry

As a proxy for latest developments, we breakdown the quarterly capex for the big three OEMs in order to highlight the paradigm shift in auto industry. So far, PSMC has incurred a capex of PkR3.4bn in 1HCY21 (+5.6xYoY), signaling new Swift in pipeline.

INDU has spent PkR571mn in the latest quarter (FY21 capex: PkR2.5bn) whereas further PkR-5.1bn (US$300mn) is underway for capacity expansion in addition to US$100mn for the production of HEVs. In contrast, the capex for HCAR in the latest quarter has declined from PkR2.1bn to PkR234mn (-80%QoQ) after concluding its plant up gradation and finally starting the production of new Honda City in 1QMY22.

The success of Kia’s Sportage and Hyundai’s Tuscon has heavily hampered the volumes of existing sedans. The local industry landscape has become competitive, hence, we can expect rising level of capex in upcoming quarters.

Keeping in mind the resale value of Toyota, Suzuki and Honda cars, we expect the big 3 OEMs to sustain their position in the local industry landscape as the cars in Pakistan are not just a mode of transport but also an investment. On the other hand, we expect frequent new model rollouts by OEMs to fetch the ball back in their courts in terms of pricing power.

Our preferred play for the sector remains INDU (TP: PkR1,774/sh), gearing up to penetrate the hybrid segment whereas PSMC (TP: PkR395/sh) remains our second best pick on the back of surging demand for small vehicles. We also have a positive stance on HCAR (TP: PkR325/sh) as the new model Euphoria is yet to subside.