Karachi, March 22, 2022 (PPI-OT): Autos – rising costs hamper Dec-2021 Q’s profitability
We review the Auto sector’s performance over 2QFY22 and highlight key factors which had a notable impact on the sector’s PAT which declined by 23% QoQ. Net sales remained largely flat on a QoQ basis where the impact of slightly lower sales volume was offset by a round of price hikes in Nov-2021
PKR devaluation and rising freight costs remained the prime culprits leading to a decline in the sector’s gross margins to 5.3% (lowest since Sept 2019).
Auto sales are anticipated to slow down during 2HFY22 due to the impact of higher taxes, rising interest rates, curbs on auto financing by SBP and higher prices.
Overview
After PSMC released its annual result today for CY21, we take a step back and analyse the sector performance during 2QFY22 from a broader perspective, identifying key factors which proved to be pivotal.
Combined PAT of the sector universe (INDU, HCAR, PSMC), declined by 23% to Rs5.7bn as all three companies witnessed a decline in their bottom line despite lower effective tax of 27% as against 30% last quarter.
Revenue generation capacity remained intact during the quarter the 3 OEMs witnessed flat growth in volumes, however, the tilt towards higher income segment was offset by 11% decline QoQ witnessed in the middle income segment dominated by PSMC. We highlight the spike in higher income sales was broadly sparked by the launch of Honda City (HCAR volumes up by 13% QoQ).
In addition, auto manufacturers announced price hike in Nov- 2021, which more than offset the price cuts that were announced post Federal Budget FY22 as tax relief measures. As a result, combined sales of the big 3 auto makers remained stable QoQ witnessing marginal growth of 0.8% to Rs142.9bn as against Rs141.8bn during previous quarter.
Rising cost pressures take their toll With the PKR devaluing by 6.1% during the quarter coupled with escalated freight rates, cost of imports surged rapidly taking its toll on the sector profitability. Gross margins of the 3 OEMs declined to 5.3% from 8.1% during previous quarter, which is the lowest since Sept 2019 (barring COVID quarter) where sector margins clocked in at 5.2%.
In order to provide relief, the auto makers were required by the GoP to hold off on any price increase before the end of CY21 which forced the OEMs to delay any cost related price increases. Ultimately the OEMs failed to meet the GoP’s demand resorting to a significant price increase of up to 15% in Nov-2021 which is expected to lift the sectors gross margins in the upcoming quarter.
Higher advances provide support to the bottom line Brought about by a mix of supply side shocks such as port congestion and auto parts shortages coupled with higher demand, delivery times of vehicles have been stretched over the past few quarters leading to a hefty build up in advances from customers.
Combined other income for the OEMs increased by 33% to Rs3.97bn as against Rs2.99bn during the previous quarter. As of Dec-2021, INDU/HCAR held Cash and Short Term Investments (STI) of Rs98bn/17.9bn (Rs1247/124 per share) while as of Sept-2021, PSMC held Cash and STI of Rs31bn (Rs377 per share).
Outlook After maintaining a solid growth momentum throughout 1HFY22, auto sales are anticipated to slow down during 2HFY22 as the impact of higher taxes, rising interest rates, curbs on auto financing by SBP and higher prices takes effect. New model launches (Swift and Civic), however, are anticipated to provide some support to sales volume during 4QFY22.