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Automobile industry review and outlook

Monthly sales of automotive industry for July 2002 were reported at 11,836 units, up 32%MoM, but down 10%YoY. This indicate a reversion to pre-COVID normalcy, completing a “V-shaped” recovery over five months while extending consecutive YoY downtrend to its 21st month (back to levels seen during 2009). Consequently, 7MCY20 total industry offtake was reported at 57,509 units, down 57%YoY), where major constituents moved down for Passenger Cars/LCVs.

Recent comparisons reveal a double digit bounce back, with PC/LCV sales up 38/7%MoM, while within PC segment, 1,300CC+ witnessed improved sales, getting closer to market expectations. Resumption of business activity, teetering healthcare externalities and concessionary borrowing rates have effectively immunized automobile sales. Yaris (recently launched) sales (1,883 units for July’20) supported growth in the 1,300CC+ segment assisting INDU in taking sales back past the 4,000 level. As sectoral catalysts push demand back to stability, INDU’s operational strengths are abundant in driving profitability higher, in our view. On a closing note, analysts have noted the absence of CKD sales by new entrants, meaning PAMA data underreports actual domestic industry sales hampering industry analysis (as they grow in prominence) where eagerly await their membership in PAMA.

Topline Securities has lifted its stance on Pak Automobiles to ‘Over-Weight’ from ‘Under-Weight’. Its optimism stems from greater-than-expected monetary easing by State Bank of Pakistan (SBP). The central bank has reduced the Policy Rate by 6.25% to 7.0% over the last five months, which has resulted in commercial banks revising their car financing schemes to more favorable terms for the clients. Historically, car financing accounts for 35-45% of the overall sales, which goes beyond 45% in a low interest rate scenario.

According to the brokerage house delivery period on most models range from one to five months, while ‘own’ money (premium paid over list price) has also increased to 5-10% of list price for receiving immediate deliveries of vehicles. The recent uptick in demand for automobiles is mainly owing to availability of: 1) low cost car financing, 2) pent up demand from last couple of years (down 16%YoY in FY19 and down 55%YoY in last financial year, 3) improving rural liquidity and 4) potential launch of new models.

The brokerage house has revised car sales forecasts up by 5-8% for FY21-FY23. In absolute terms, it expects car sales of the industry to rise to 169,231 (+35%YoY), 216,890 (+28%YoY) and 253,150 (+17%YoY) during FY21, FY22 and FY23 respectively (including KIA, Hyundai and imported). Its revised car sales estimate for FY21E still remains 49% lower than the highest sales recorded in FY18. As a result, earning estimates for Topline Car Assemblers Universe (INDU, HCAR and PSMC) are revised up by 11-272% for FY21E-23F primarily on the back of improved outlook for car sales, which in turn will lead to better margins due to their high operating leverage and better inventory management.


Indus Motor Company (INDU) announced earnings of Rs99 million for 4QFY20 (EPS: Rs1.26), down 97%YoY) taking FY20 full year earnings to Rs5,082 million (EPS: Rs64.67), down 63%YoY). Along with the result, the Company also announced a final cash dividend of Rs7.0/share for 4QFY20, taking full year payout to Rs30.0/share.

The Company’s revenues declined by 45%YoY in FY20, mainly due to 57%YoY fall in unit sales. The demand for new cars remained depressed throughout the outgoing year amidst high car prices and negative impact of COIVD-19 on consumer buying.

During 4QFY20, revenues declined by 78%YoY and 69%QoQ due to COVID-19 related lockdowns and restrictions during the quarter, where unit sales dropped by 81%YoY and 72%QoQ. The company had Non Production days of 55-60 during the quarter. The lower unit sales also resulted in Gross Loss of Rs324 million for 4QFY20, given the high fixed cost/unit.

The Other Income of Rs11.04/share in 4QFY20 supported the bottom line of the company. However, it also declined by 22%QoQ due to monetary easing by State Bank of Pakistan which resulted in lower interest rates.

Management of Honda Car (HCAR) expects car sales to continue its rising trend in FY21 on the back of improved economic activity coupled with lower interest rates. However, the company does not intend to move to second shift production in the near term to meet high demand, as they plan to optimally manage production levels to meet demand.

Auto financing contributes 20-30% of total car sales for HCAR. However current scenario of low interest rates is likely to increase this ratio beyond 30%.

After the launch of Kia Sportage and Hyundai Tucson, the management believes competition for HCAR will not be augmented much, as both these models are in SUV segment and have higher prices as compared to HCAR sedan models. However, the recently launched Yaris, has given tough competition to the City model.

A regards combined sales of Civic and City, Civic sales contribute 60% and City contributes 40%. Percentage of HCAR sales to urban segment is 60% and for rural segment 40%.

In terms of auto parts localization, levels are Civic, 60%, City 70% and BRV 40%. However, in terms of absolute amount (PKR) the localization level is around 25% to 30%. HCAR prefers to use local auto parts as compared to foreign components which meet their quality criteria. The company intends to further increase its localization levels using local auto parts given they meet the required quality standards.

The management further commented that to achieve optimal gross margins, there can be further hikes in car prices. The total taxes on invoice price of car ranges from 33% to 35%.

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