Karachi, January 07, 2022 (PPI-OT): Pakistan Autos: Mini budget to roll back the incentives

Through the supplementary finance bill, govt. is reversing much of the relaxations announced back in FY22 budget in form of FED and GST. The proposed bill has doubled the rate of FED on vehicles above 1,000cc whereas GST on 1,000cc vehicles has been reverted back to 17% (vs existing 12.5%).

Now that the incentives are being rolled back, we expect a slight slowdown in the industry growth as soon as prices are increased. In our base case, we expect the volumes in CY22 to remain stagnant at CY21 level where a deviation of 10% on either side impacts the profitability of AKD auto universe by ~12%.

The mini budget may also prove to be a blessing in disguise as much of the importance has been stressed upon the curtailment of imports. Hence, protective duties (read: FED and RD) on imported CBUs have also been increased in the proposed finance bill which bodes well for local industry.

We expect the growth in profitability to be driven mainly on the back of expanding margins in CY22 on account of i) sustainable currency (after IMF returns), ii) reversal in commodity upcycle (spread of Omicron), and iii) new models in pipeline (INDU’s Hybrid Corolla, PSMC’s Swift and HCAR’s Civic).

As of now, the bet can be placed on PSMC’s Swift which may be unveiled this year and could possibly trigger a rally in stock price (TP: PkR296/sh – 29% upside). Similarly, we have revised our estimates for HCAR (TP: PkR301/sh – 29% upside) in light of positive developments surrounding the 11th gen Civic. INDU (TP: PkR1,645/sh – 33% upside, 13% DY), on the other hand, is trading at a deep discount (FY22/23 P/E of 5.3/5.4x) – Buy!