Karachi, September 26, 2023 (PPI-OT): Autos: Sequential improvement during 4QFY23

We review Auto sector's performance for June quarter results wherein the sector showed improvement in profitability primarily due to better operating results driven by impact of higher pricing.

The rupee's unprecedented depreciation and a surge in taxes have resulted in numerous rounds of price increases since January 2023. Impact of these measures coupled with high inflation and rising interest rates have been eroding consumers' purchasing power, negatively impacting automotive sector's volumetric sales.

Pakistan's automobile sector faces major challenges, including weak demand, rapid price escalation, expensive auto financing and deteriorating macros. While there are signs of supply side recovery, the path to normalcy for the sector remains uncertain over sector's ability to further increase prices from here onward.

4QFY23: Sector shows improvement on a sequential basis

Auto sector’s listed space (INDU, HCAR, PSMC) gets in positive territory during 4QFY23 (PAT: Rs7.2bn vs LAT: Rs10.5bn last quarter) owing to a sequential bounce back at the operating level to Rs7.0bn vs Rs4.4bn in Mar-2023 quarter. Core business improved QoQ mainly on the back of realization of higher pricing.

Volumes remained dull during June quarter

Administrative controls by SBP limiting establishment of LCs for imports of CKD kits remained the major source of supply side disruption. Leaving supply side issues aside, demand also remained dull. Sales volume, marred by demand and supply issues, dropped by 80%/38% on a YoY/QoQ basis during June quarter. Out of the three old listed auto players, PSMC grabbed the largest chunk of sales (55%) followed by INDU (41%) whereas HCAR lagged behind with a 4% share.

Price hikes provide support to INDU and PSMC’s margins

Sector margins during June quarter improved as the gross margin clocked in at 14% vs 8% in the preceding quarter. The improvement mainly came on the back of higher prices. INDU managed to post gross margins of 18% vs 6.3% during previous quarter whereas PSMC posted gross margins of 10%, slight improvement of 1 ppt on a QoQ basis. HCAR, however, posted a gross loss during the quarter.

PSMC reports net finance cost reversal on exchange gains

As the 3 OEMs remain largely debt free, finance costs for the respective companies continued to remain on minimal levels. Moreover, as PSMC accounts for exchange gains/losses under finance costs, the company’s exchange gains of Rs3.5bn reported in June quarter led to a net reversal in finance costs of Rs2.7bn.

Demand side issues to persist

The rupee's unprecedented depreciation and a surge in taxes have resulted in numerous rounds of price increases since January 2023. Impact of these measures coupled with high inflation and rising interest rates have been eroding consumers' purchasing power, negatively impacting automotive sector's volumetric sales. We maintain our ‘Sell’ stance on the sector where we foresee ongoing supply and demand issues coupled with suppressed margins and weakening cash position to keep sector profits in check. Any favourable change in current duties and taxes structure for the auto sector and / or quicker turnaround on the macro level, remain key upsides to our thesis.