Karachi, April 11, 2023 (PPI-OT): Autos: Mar-2023E volumes to jump 86% MoM on raw material availability

We preview auto sales volume for Mar-2023 where we foresee sales to improve from multi-year low levels to 8.2k units, up 86% MoM driven by higher operating days for INDU and PSMC. During Mar-2023, HCAR’s plant remained closed for 22 days; INDU’s plant remained shut for only 4 days, while PSMC’s plant remained fully operational throughout the month.

Despite short-term improvement, our Sell stance on the sector remains, where we expect the combined impact of subdued demand and supply constraints to keep profits in the sector restricted.

With foreign exchange reserves at critically low levels leaving little room for improvement on the supply side for auto manufacturers, we expect cumulative volume decline during FY23 to clock in at more than 50% YoY extending into 1HFY24 as well.

Improved raw material supply to boost Mar-2023E sales

We preview auto sales volume for Mar-2023 where we foresee sales to improve from multi-year low levels to 8.2k units, up 86% MoM. The rebound comes on the back of higher operating days for INDU and PSMC, while HCAR witnessed lower operating days a reversal of last month’s situation. Sales growth for 9MFY23 however, may remain in negative territory clocking in at 99.6k units, down 49% YoY.

Sales for PSMC are expected to witness the highest improvement as the company’s plant remained fully operational during the month compared to 8 days of plant closure during Feb-23. INDU similarly witnessed improvement of 5% MoM in its volumes with 4 plant closure days this month vs 14 days in Feb-23 while HCAR on the other hand is expected to see its volumes half to 800 units with 22 plant closure days vs no closures in Feb-23.

Plant closures to drive sales trend in the near term

While demand outlook for autos remains bleak with higher auto prices and record-high interest rates along with slowdown in the economy, supply side concerns augment the dull outlook.

Foreign exchange reserves continue to remain at critically low levels. This leaves little room for improvement on the supply side for auto manufacturers which have been struggling to keep operations ongoing due to raw material shortage. We, hence, expect cumulative volume decline for FY23 to clock in at more than 50% YoY, extending into 1HFY24 as well.

Adding pressure on already thin margins

On the cost side, unprecedented levels of inflation and rapid PKR devaluation (-25% QoQ) post the shift from fixed currency regime to a free floating one have raised production costs significantly for the automakers squeezing margins. To counter the impact, automakers have undertaken multiple rounds of price hikes (4-5 rounds since Jan-23) which is expected to keep demand at minimum levels and margins under pressure as well.

We maintain our Sell stance on the sector where we expect the combined impact of subdued demand and supply constraints to keep profits in the sector restricted. Any drastic resolution of supply side issues remains an upside trigger to our investment thesis.