Karachi, September 29, 2022 (PPI-OT): Autos: Production halts to bleed sector profitability

To curtail external pressures, SBP has come up with administrative measures to reduce the country’s import bill. One of them has been allotting CKD import quota to automakers, allowing the latter to import 50% of average imports witnessed during Feb-May 2022.

This has coupled with ongoing slowdown in auto demand, leading to automakers opting for plant shutdowns with INDU and PSMC having announced plant closures for half of Aug-2022 and Sept-2022 while HCAR has announced that the company has observed 3-4 non production days.

With purchasing power of consumers deteriorating rapidly amid aggressive cost led price hikes and worsening macros we foresee a decline of almost 50% in auto sales during FY23. We present a scenario analysis of change in volumes on the sector profits where our best-case reports average gross margins of 4.8%, while worst case depicts gross margins at 3.6%.

SBP limits imports of CKD kits

In an attempt to control the country’s ballooning CAD, the government has been taking several measures to limit the import bill and ease the pressure on PKR against US$. Among these measures was the change in procedure for importing CKD kits where automakers are now required to obtain clearance from SBP for opening of LCs.

The change in procedure has been hindering production in the sector as lead time for import of raw material has increased considerably. Moreover, SBP has allotted a quota of CKD imports to the automakers which allows the latter to import 50% of average imports of Feb – May 2022. The said quota was to be increased monthly from 50% up till 70% by Sept-2022, however, as per the automakers, the quota still remains in place at 50% with no future guidance from the regulators.

Leading to plant closures

With rising lead times for import and limited availability of raw material, the already ailing sector with deteriorating demand is now faced with supply issues as well further adding to the woes. In response to the situation, automakers have opted for plant shutdowns with INDU and PSMC having announced plant closures for half of Aug-2022 and Sept-2022 while HCAR has announced that the company has observed 3-4 non production days which are expected to increase in the coming months as well. As per the management of INDU, the company is currently operating on 40-45% capacity utilization and does not expect to go beyond 60% in the near future given the demand and supply scenario.

Base case volumes and impact

With purchasing power of consumers deteriorating rapidly amid aggressive cost led price hikes, rising cost of auto financing, impact of regulatory measures and destruction caused by floods, demand for autos is likely to take a hit during the year where we foresee a decline of almost 50% during FY23. To recall, 2MFY23 sales have declined by 50% YoY.

Our estimate includes the impact of supply side issues such as the ones mentioned above. Considering the lack of clarity from regulators regarding the import quota for CKD kits, we present scenarios analysis that reflect extension of plant closures and early improvement of the import situation. Our base case assumes 50% quota for 1QFY23 to continue on into 2QFY23 and increase to 70% for 3QFY23 and 4QFY23. Our analysis reflects 4.8% gross margins for the sector during FY23 in the best case, while 3.6% margins in the worst case.