JS Securities Limited – Morning Briefing

Karachi, October 11, 2018 (PPI-OT): Auto sales up 3% YoY in Sep18; weak sector outlook amid rupee depreciation

Auto sales for Sep-2018 crept up marginally by 3% YoY to 19,345 units, however, were down by 4% YoY during 1QFY19, reflecting a receding growth pattern over recent months as challenges mount for the sector.

Honda Atlas Cars (HCAR) saw 32% YoY growth during the month, belying slowing demand and a depleting order backlog.

Indus Motor Company (INDU) experienced negligible growth; however, the product mix has shifted from more pricier cars towards Corolla.

Pak Suzuki (PSMC) saw sales dip by 5% YoY, as price increases weigh down on the company’s price-sensitive models, while further price increases are expected following the recent round of rupee devaluations.

Auto sales up by a mere 3% YoY in Sep-18, issues evident

Auto sales (Cars and LCVs) for Sep-2018 were in line with our projections, clocking in a mere 3% YoY higher at 19,345 units, with all signs pointing towards a potential slowdown in coming months. To put things in perspective, auto sales have declined by 4% YoY during 1QFY19, compared to 10% YoY growth in 9M2018, while it stood at 16% YoY in the first six months of the calendar year. A major impediment to sector’s volumes remained the restriction on non-filers against purchase of new cars, which is expected to cause further misery to OEMs in coming months, given a massive chunk of demand originates from non-return filing customers. Add to it the woes of a depreciating local currency, which has prompted at least three price increases in this year alone from the OEMs which is starting to reflect via a volumetric contraction. Further price increases are anticipated on the back of the latest round of rupee devaluation, as assemblers will look to pass on as much of the burden as they can to consumers, which will heap more pressure on unit sales.

Finally, interest rates have increased by a cumulative 275bps during the 9M2018, which has made auto financing more expensive. While it has not reflected on demand for car financing as heavily so far, further rate hikes could take the benchmark 1-year KIBOR rate into double digits (currently at ~9.9%), and ultimately to levels of ~11-12%, from where a pullback in auto financing demand could potentially be more visible going forward.

HCAR drove auto sales with 32% YoY

Honda Atlas Cars (HCAR) was the only company among the three major assemblers to post growth, with unit sales up by 32% YoY during the month. However, it should be noted that the company’s backlog orders have shrunk in recent months, while the pace of new orders has slowed down. Indus Motor Company (INDU) witnessed a flat performance during the month, however, its product mix has shifted more towards Corolla in Sep-2018 (90% vs. 83% in 1QFY18), and away from relatively higher priced cars, Hilux (down 42% YoY) and Fortuner (down 29% YoY). Pak Suzuki Motor Company (PSMC) saw sales fall by 5% YoY during the month, due to massive declines in its lower cost variants, namely the soon-to-be-discontinued Mehran (down 37% YoY), and LCVs Bolan (down 23% YoY) and Ravi (down 14% YoY), where recent price increases are searing into the company’s recent growth trend. On a positive note, sales of PSMC’s other variants Wagon-R (up 61% YoY), Swift (up 41% YoY) and Cultus (up 18% YoY) all reflected healthy signs, limiting the downside to the company’s volumes.