Karachi, March 09, 2023 (PPI-OT): Autos: Hitting rock bottom; Feb-23 sales down 53% MoM

We preview auto sales volume for Feb-2023 where we foresee sales to drop to 4.4k units, down 53% MoM, hitting its 14-year low over (barring COVID-19 phase) reduced operating days for INDU and PSMC and restricted demand in the sector.

With limited forex reserves and administrative controls to curb imports still in place, volumes for the automakers are expected to remain at low levels taking view of production issues, price hikes, tax changes and interest rate hikes. We expect cumulative volume decline during FY23 to clock in at more than 50% YoY extending into 1HFY24 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, keeping stock performances restricted.

Raw material shortage disrupts industry operations

We preview auto sales volume for Feb-2023 where we foresee sales to drop to 4.4k units, down 53% MoM. Monthly volumes have now hit their 14-year low where the last time we saw similar volumes was in Dec-08 (barring Covid). The decline comes on the back of lower operating days for INDU and PSMC amid limited raw material availability and subdued demand with deteriorating purchasing power of customers. Sales growth during 8MFY23 remained in the negative territory with volumes of 91.3k units, down 46% YoY.

Sales for HCAR are expected to witness a relatively lower decline compared to its peers sequentially as the company’s plant remained operational in Jan-23 and Feb-23 both. Ailing demand in the sector and import curbs, however, resulted in a 41% MoM decline. Sales for INDU and PSMC are expected to drop 50%/67% MoM respectively, for the same reason compounded by plant closures. To recall, plant for INDU remained closed for 14 days in Feb-23 vs no closures in Jan-23 whereas PSMC’s plant remained closed for 8 days in Feb-23 vs 18 days in Jan-23.

Outlook remains bleak: supply side issues to persist

With limited forex reserves and administrative controls to curb imports still in place, volumes for the automakers are expected to remain at low levels pressed by both supply and demand side impediments. With demand staggered for the OEMs, a ripple effect can be seen in the local Auto Parts industry as well with manufacturers such as Agriauto Industries Ltd (AGIL) opting for plant closures as well. Even once import controls are relaxed, automakers will continue a bumpy ride with sky high prices driven by sharp PKR devaluation and higher interest rates.

For perspective, automakers have increased prices 3-4 times in CY23TD by up to 29% in response to sharp PKR devaluation against the US$ by 12% during the same period and increase in GST from 17% to 18% as announced in the Mini Budget. Additionally, the SBP in its last MPC meeting further hiked interest rate by 300bp to 20% squeezing demand for auto financing. We expect cumulative volume decline during FY23 to clock in at more than 50% YoY extending into 1HFY24 as well.

We maintain our Underweight 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.