JS Securities Limited – Morning Briefing
Karachi, January 11, 2018 (PPI-OT): Autos: Record sales in 2017 as Dec volumes increase 20% YoY; profits to rise as well
As per PAMA data, auto sales (total Cars and LCVs) in Dec-2017 stood at 19,237 units, registering a growth of 20% YoY and taking cumulative sales in full-year 2017 to an all-time high of 239,742 units (+18% YoY).
Honda Atlas Cars (HCAR) recorded 33% YoY growth during the month mainly on the back of BR-V sales (introduced in Apr-2017).
Pak Suzuki Motor Company (PSMC) volumes were up 29% YoY, where surging volumes of Wagon-R (up 100% YoY) lifted company’s sales.
Indus Motor Company’s (INDU) unit sales dropped 3% YoY, however, Fortuner sales grew by 13x YoY.
We anticipate sector’s profitability to grow by 29% YoY during Oct-Dec 2017, on the back of (1) 24% YoY volumetric growth and (2) price hikes.
We reiterate INDU as our top pick in JS Auto Universe, with a Dec-2018 Target Price of Rs2,254.
Auto sales up 20% YoY in Nov-2017, HCAR outperforms
As per PAMA data, auto sales (total Cars and LCVs) in Dec-2017 stood at 19,237 units, registering a growth of 20% YoY and taking cumulative sales in full-year 2017 to an all-time high of 239,742 units (+18% YoY). As has been the trend over the past few months, Honda Atlas Cars (HCAR) outperformed the industry, with unit sales rising by 33% YoY, mainly due to the introduction of BR-V in Apr-2017. Pak Suzuki Motor Company (PSMC) followed suit with 29% YoY growth during the month. Wagon-R was the star performer, with sales doubling over the previous year to 2,758 units (Dec-16: 1,382 units), which we attribute to demand from commercial users (online taxi apps).
Other models recording double-digit growth included Mehran (up 22% YoY), Swift (up 18% YoY), Cultus (up 15% YoY) and Bolan (up 10% YoY). Indus Motor Company (INDU) remained a laggard, with unit sales declining by 3% YoY. We believe INDU’s sales decline during the month was partly due to the company management’s recent policy to cancel bookings for profiteers in order to reduce lead times for genuine buyers. On the bright side, its high margin Fortuner variant recorded a 13x YoY increase in sales during the month, with 230 units sold in Dec-2017. Among other segments, tractors recorded robust growth in sales, with Millat Tractors (MTL, up 52% YoY) and Al-Ghazi Tractors (AGTL, up 74% YoY), both continuing to benefit from pro-agriculture policies. Sequentially, industry witnessed a 9% MoM decline, which we attribute to the seasonality factor typically seen in December, where customers delay purchases to the New Year.
Profitability likely to grow by 26% YoY during Oct-Dec 2017
During Oct-Dec 2017 quarter, we anticipate JS Auto Universe (comprising INDU and PSMC) profitability to grow by 26% YoY, mainly due to rising volumes (up 24% YoY) and price increases since last year. Hence, we expect gross profits to grow by 23% YoY, even though gross margins are likely to shrink by 92bps YoY, owing to higher CRC prices during the quarter.
INDU remains our top pick in Pak Auto space
We maintain INDU as our top pick in the Pak Auto space, with a Target Price of Rs2,254, offering an upside of 28% from last closing. The stock currently trades at FY18E P/E of 9.6x, offering a D/Y of 7%. We highlight company’s pricing power, as displayed recently when the company raised prices of certain models to pass on the impact of PKR depreciation. Key risks to our investment thesis are (1) higher- than-expected PKR depreciation and (2) lower-than-expected demand growth.