JS Securities Limited – Morning Briefing

Karachi, May 01, 2019 (PPI-OT): Auto volumes continued to depress in April

Total passenger car and LCV sales during Apr-2019 fell 24% YoY, the biggest monthly decline in volumes since Jul-2014.

It seems unlikely that volumes will post any meaningful recovery in FY20 (we expect a decline), specifically considering any further rupee devaluation and interest rate increases in lieu of the IMF program.

Pak Suzuki (PSMC) saw volumes shrink 27% YoY during the month, on the back of discontinuation of Mehran’s production and massive drops in Ravi (-43% YoY) and Bolan (-33% YoY) sales.

Honda Atlas (HCAR) saw an even sharper decline in demand (-38% YoY) mainly on the back of combined Civic and City sales (-43% YoY).

Indus Motors’ (INDU) sales reduced by a minor 7% YoY, as 6% YoY growth in its top seller Corolla compensated for 63% YoY and 60% YoY plunges in Fortuner and Hilux sales, respectively.

Passenger car sales down 24% YoY in April
Total passenger car and LCV sales during Apr-2019 stood at 19,437 units, marking a decline of 24% YoY, the biggest monthly decline in volumes since Jul-2014. A host of well documented factors have contributed to the falling volumes in the auto industry, led by price increases (due to rupee devaluation), higher interest rates, government regulations (FED imposition on 1,700cc and above engine sizes), etc. It seems at the moment that the growth cycle for the sector (FY14-FY18 volumes CAGR: 17%) is well and truly over, as volumes during FY19 are almost certainly destined to stand significantly lower compared to the previous year.

This forecast for the remaining two months of FY19 assumes 6% YoY decline in volumes, akin to the performance during 10MFY19, whereas, given the trend in recent months, volumes could actually drop by a higher percentage during these two months. This is because of recent developments such as the FED imposition (which will likely hurt Civic and Corolla sales) and the ceasing of production of Mehran from Apr2019 (zero units produced) on top of aforementioned negatives.

It is also noteworthy that one of the new entrants, Renault is rumoured to have halted its production efforts for the time being due to deteriorating market conditions for auto assemblers, whereas statements from senior management of Kia Lucky Motors have surfaced, recommending ceasing of greenfield incentives for any additional new entrants as it would make the environment unfeasible for the companies that have already invested in the country’s auto industry under the Auto Development Policy 2016-21. Going forward, it seems unlikely that volumes will post any meaningful recovery in FY20 (we expect a further decline), specifically considering if there is any rupee devaluation and interest rate increases in lieu of the IMF program.

PSMC and HCAR falter yet again, INDU saved by Corolla
Pak Suzuki (PSMC) posted a decline in volumes of 27% YoY during the month (10MFY19 unit sales: down 11% YoY), mainly on the back of curtailment of its highest selling brand’s (Mehran) production (the replacement Alto is yet to reach the market) and massive drops in Ravi (-43% YoY) and Bolan (-33% YoY) sales. Honda Atlas (HCAR) saw demand drop even more sharply (-38% YoY) mainly on the back of combined Civic and City sales (-43% YoY). Although numbers for these variants are not provided individually, we suspect the contraction is possibly more drastic in Civic considering that the 10% FED applies to the variant.

Indus Motors (INDU) saw sales reduce by a minor 7% YoY compared to the other two, as 6% YoY growth in its top seller Corolla compensated for 63% YoY and 60% YoY plunges in Fortuner and Hilux sales, respectively. One plausible reason why the Corolla has not seen declining sales similar to the Civic, despite the fact that the FED also applies to the 1.8L Altis Grande is that Corolla is available in multiple engine sizes, such as 1.3L and 1.6L which are priced lower than the 1.8L variant. On the other hand, the Civic offers only one other option that escapes the FED, namely the 1.5L Turbo, which is actually priced 12% above the highest priced 1.8L Civic version.

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