Karachi, September 08, 2022 (PPI-OT): Auto demand woes to trim sales by 17% MoM in Aug

We preview Auto sales volume for Aug-2022, where we foresee sales to further shrink to 9.6k units down 17% MoM (down 54% YoY), as demand for autos struggles to remain afloat, amid escalating car prices and expensive auto financing. Moreover, administrative controls on imports have also impacted the supply side that has led to plant closures.

Honda Atlas Cars (HCAR) management had apprised regarding expected 3-4 non-production days for their plant in Sep-22. Indus Motors (INDU) has so far announced two 15-day plant closures – first half of Aug-2022 and first half of Sep-2022 (in progress). Pak Suzuki Motors (PSMC) has announced shutdown of their plant since mid-Aug, and still continues.

These closures will likely dent Sep-2022 sales in larger magnitude, while we anticipate a drop of more than 25% for full year FY23. Impact of floods is also expected to take INDU among the underperformers owing to higher dependency on rural sales. Margins of the sector, however, are expected to remain relatively stable supported by recent aggressive price hikes.

Supply issues compound already ailing volumes

We preview auto sales volume for Aug-2022 where we foresee sales to further shrink to 9.6k units, down 17% MoM. The drop comes as demand struggles to remain afloat amid rising car prices, low demand for auto financing amid high interest rates and measures taken by regulators compounded by plant closures.

PSMC is likely to witness the highest drop of 40% MoM as its plant remained closed in second half of the month in addition to demand woes. HCAR sales are expected to drop 29% MoM owing to restricted demand and 3-4 non production days.

As INDU witnessed a double whammy of 1) plant closure and 2) impact of pre-buying in Jun reflected in July, the base set was among the lowest monthly sales the company made in the last 3 years. Hence, with some days of plant closed in Aug again, INDU will likely witness sales increase of 60% MoM. This translates to 34% decline when compared to a regular month like May-2022 (38% decline for HCAR and 68% for PSMC from the same time).

Plant closures – distresses keep mounting

Ongoing challenges regarding delay on CKD imports have led to supply side issues, piling on to already declining demand. In Jul-2022, automakers were allowed to import only 50% of their average imports over the last 4 months. The quota was to be increased to 60% for Aug-2022 and 70% for Sept-2022 continuing at 70% thereon. As a result of this, automakers have been running low on inventory, opting for plant closures after having already closed advance bookings Honda Atlas Cars (HCAR) management had apprised regarding expected 3-4 non-production days for their plant in Sep-22. Indus Motors (INDU) has so far announced two 15-day plant closures – first half of Aug-2022 and first half of Sep-2022 (in progress). Pak Suzuki Motors (PSMC) has announced shutdown of their plant since mid-Aug, and still continues.

Outlook – relatively stable margins at the cost of demand

Sales volume for Autos are expected to continue on a downward spiral in light of the factors discussed above, where we anticipate a decline of more than 25% during FY23. Further risks stem from ongoing floods, which are expected to take INDU among the underperformers owing to higher dependency on rural sales.

Margins on the other hand witnessed a bounce back in 4QFY22 (barring INDU) as the impact of price hikes undertaken in Mar/May-2022 weighed in. We expect a bounce back in INDU’s margins from its lowest ever margins currently (barring COVID) followed by a certain amount of stability in margins for auto makers thereon supported by the additional round of aggressive price hikes in Jul-2022.