FLASHNEWS:

JS Securities Limited – JS Research (January 07, 2022)

Karachi, January 07, 2022 (PPI-OT): Autos: Robust growth in Dec-2021E before industry pressures take control

Tax relief measures announced in the Federal Budget have achieved their intended target of generating sales volume and improving affordability as the industry has posted a remarkable growth of 61% YoY during 5MFY22.

The trend is expected to continue in Dec-2021 as volumes are expected to grow by 98%/48% YoY/MoM with PSMC leading the charge followed by HCAR.

Price increases due to rising raw material cost, reversal of tax reliefs and rising interest rates are likely to keep industry volumes under pressure during 2HFY22.

INDU stands as our top pick from the auto space due to its lower dependence on auto financing, higher demand from the rural sector and lower sensitivity of their customers towards price changes.

Auto policy measures claim success

Post tax relief measures announced in the Federal Budget in June-2021, where FED and sales tax on vehicles was reduced, auto sales have posted stellar growth where industry sales are up by 61% YoY during 5MFY22. The government’s goal for announcing these measures was to generate volume and improve affordability in the sector by focusing more on the less than 1,000cc segment making PSMC the prime beneficiary.

So far, the policy has been successful in achieving its desired goal as reflected in the numbers where growth during 5MFY22 was largely driven by PSMC posting a growth of 89% YoY followed by INDU (44% YoY) and HCAR (25% YoY). While the trend is expected to continue for the month of December as well, keeping in view recent developments in the industry we do not see this momentum to sustain during 2HFY22.

Sales to hit peak in Dec-2021

Sales volume is expected to continue its momentum going in Dec-2021 where industry sales are expected to post a robust growth of 98%/48% on a YoY/MoM basis respectively, clocking in at 26,426. Sales during 1HFY22 is expected to grow by 68% YoY.

PSMC is expected to post a robust growth of 82% on a MoM basis clocking in at 15,503 units. Alto is expected to lead the charge maximizing on the demand generated due to the aforementioned factors. Furthermore, bookings for Cultus/Wagon R/Picanto remained closed during October and November which is expected to divert sales to the vehicle too.

HCAR is expected to post a growth 56% mainly led by growth in demand for the recently launched City. Civic and City combined are expected to sell 4,405 units during Dec-2021 out of which 70% of sales are expected to be contributed by City. INDU sales, however, are expected to remain flattish MoM as Yaris sales remain under pressure due to growing sales of Honda City (down by 2%).

Excitement to be short lived

Key developments since the budget announcement including (1) escalating raw material prices leading to a price increase by automakers in Nov-2021 and (2) rising interest rates reducing demand for auto financing, are expected to dent the on-going growth momentum during 2HFY22. Furthermore, the government in the recently announced Mini Budget has reversed a number of incentives that were offered to the auto sector in Jun-2021, which is likely to add pressure to auto makers doing another round of price increase announcements, further negatively impacting potential demand for vehicles.

Adversities to play in favour of INDU

Despite mounting pressures on industry volumes, we remain positive on INDU due to the company’s lower dependence on auto financing (30% of total sales), higher demand from the rural sector (50% of total sales) and lower sensitivity of its customers to price increases.