Karachi, August 31, 2022 (PPI-OT): Autos: 4QFY22 profits suffer despite robust volumes
We review Auto sector’s performance over 4QFY22 results and discuss the outlook. During the quarter, despite stable volumes, rising other income and rounds of price increases, the sector’s combined PAT declined to Rs1.6bn (-67% QoQ), dragged down by lower gross profits and imposition of super tax.
Despite sequential improvement in margins for PSMC/HCAR, sector margins were dragged due to deterioration in margins of INDU which faced delayed impact of higher production costs.
Going forward, we expect industry volumes to suffer a decline of more than 25% during FY23, while sector margins are expected to improve QoQ as a rebound in margins is anticipated for INDU in the next quarter.
4QFY22: Auto sector PAT declines 67% QoQ
INDU released FY22 results yesterday which concluded our Auto Sector universe results for 4QFY22. Combined PAT of our universe (INDU, HCAR, PSMC), declined 67% QoQ to Rs1.6bn. Despite support from growth in net sales and other income, profits in the sector suffered due to declining gross profits (due to INDU) compounded by imposition of super tax. Although HCAR and PSMC witnessed sequential improvement in their performance, INDU struggled to maintain profits during the quarter.
Price hikes and model launches drive growth in net sales
Demand for autos remained elevated during 4QFY22, sequentially up 4% QoQ to 68k units amid aggressive pre-buying by customers in Jun-2022 and recent model launches. Additionally, auto makers resorted to aggressive price hikes of upto 20% in Mar/May-2022, to combat escalating production costs. As a result, net sales for the sector grew to Rs167bn, up 14%QoQ.
Delayed but not avoided: INDU’s margins suffer
Sector margins trimmed further as INDU posted record low margins (barring COVID quarter) in more than a decade of 1.2% as against 7.7% during previous quarter. PSMC and HCAR saw similar erosion of margins during 3QFY22 which notably improved in 4QFY22. We believe higher inventory levels at cheaper rates helped INDU sail through 3QFY22 with stable margins at a time when its peers faced the brunt of higher production costs, however, as evident from the result, the impact was delayed rather than avoided.
Healthy cash position softens impact of super tax
Tax charges during 4QFY22 more than doubled to Rs5.1bn (up 115% QoQ) despite 7% QoQ decline in profit before tax, owing to imposition of super tax by GoP. The impact was however, softened by the inflow of other income which saw a jump of 56% QoQ to Rs6.8bn. Cumulative cash and STI balance of the automakers (listed space) now stand north of Rs172bn as per the latest accounts, which have mostly been collected as advance payments from customers providing healthy support to bottom line in times of rising interest rates.
Outlook
With growing concerns such as multiple cost led price hikes, rising interest rates, adverse steps taken by the regulators and the impact of recent floods, demand for autos is likely to suffer in the upcoming quarters where we foresee a drop of more than 25% in FY23. On the supply side, SBP has limited import of CKD kits for auto makers. Maximum CKD imports are now capped at 70% (Sept-2022 onward) of average imports over last 4 months. As a result, automakers are facing non production days in an attempt to smooth out the production process.
After having dipped to record lows in 4QFY22, we expect margins for INDU to post a recovery in the next quarter (a similar trend to what its peers have witnessed this quarter) whereas we expect margins for PSMC/HCAR to remain range bound in the next couple of quarters, having passed on the benefit of respite in PKR/US$ to customers.