Karachi, January 12, 2022 (PPI-OT): PSMC: Least impacted by evolving tax policy on autos

We reiterate our positive stance on PSMC due to higher than anticipated demand for Alto coupled with a declining trend in its price making it an attractive investment with our revised TP of Rs295 (+30% upside).

The stock’s CY22F P/E trades at an attractive level of 6x, which incorporates a volume dip of 20% YoY in the ongoing year.

Going forward, we expect a gradual correction in the margin from 5.7% to 6.4% during CY22-CY25 as the commodity cycle reverses and sale volume moves towards recovery.

Alto to generate excitement in PSMC

With higher than anticipated demand for Alto, as it remains unaffected by the Mini Budget, coupled with the stock’s recent price correction since the new year we reiterate our positive stance on the stock with a revised TP of Rs295 providing an upside of over 30%. We expect the company to post an EPS of Rs36.66 for CY22, trading at a PE of 6.14x. Our base case incorporates a decline in sales volume for PSMC by 20% YoY to 98,610 in CY22F before recovering to 106,306 units (up by 8% YoY) in CY23F. We expect gross margins to clock in at 5.7% for CY22 as we expect commodity prices to remain elevated during 1HCY22 coupled with lower sales volume YoY.

Going forward, we expect a gradual correction in the margin from 5.7% to 6.4% during CY22-CY25 as the commodity cycle reverses and sale volume moves towards recovery. Furthermore, the company has paid off all of its debt which have been a drag on the company’s earnings and now holds a sizeable cash balance of Rs31bn (Rs377/share), which is expected to support the company’s bottom line.

Least impacted by evolving tax policy on autos

The GoP announced multiple tax relief measures in the Federal Budget FY22 with a prime focus on the lower than 1,000cc segment through FED and Sales tax reduction, however, with the recent Mini Budget, the GoP has withdrawn sales tax relief (12.5% as against 17%) for 850cc-1,000cc announced earlier in June 2021. This excludes vehicles such as Cultus/Wagon R/Picanto leaving Alto as the prime beneficiary in the lower than 1,000cc segment. Hence, we have incorporated an upward revision in our sales volume assumption for Alto.

Mounting pressures in the industry

Industry volumes are expected to remain under pressure going into CY22 owing to price increase by auto makers in Nov-2021, rising interest rates negatively impacting auto financing demand and imposition of taxes in the Mini Budget leading to another round of price hikes by the automakers. Despite the pressures, we believe the market has overplayed the concerns in the auto space.