AKD Securities Limited Equity Research – Daily Report (15-11-2019)

Karachi, November 15, 2019 (PPI-OT): Pakistan Autos: Shying away from major model upgrades

An analysis of updated financial accounts for auto OEMs now indicates a “cooling-off” of industry CAPEX with the last trailing twelve month (TTM) total outlay reaching PkR13.6bn, down 6.4%QoQ with PSMC/INDU/HCAR contributing 24/70/6%, as slowing demand dynamics hamper/delay new product launches and OEMs revert back to maintenance CAPEX levels

The industry’s TTM topline/gross profit levels have receded 5.2/40.4%YoY showcasing persistent strains on core profitability (two consecutive quarters of declining sales), where players dealt with FX fluctuations drastically hiking retail prices coinciding with a period of demand weakness (monetary tightening, inflationary pressures, lower disposable incomes)

In terms of cash flows, net working capital outflows remain a sap on operating cash flows. While slowing CAPEX helps in reducing outflows, OEMs may be revisiting the case for adding leverage to their balance sheets, a trend initiated by PSMC (ST borrowing of PkR21.3bn as of Sept’19, up PkR14.2bnQoQ). That said, as long as major OEMs remain profitable and CAPEX reverts back to maintenance levels, leverage could be avoided.

Backed by our conversations with industry participants, we put forward a conservative outlook for demand, with little room available to spur demand from new model launches. In this case, we believe any cost de-escalations or significant discounting by OEMs could drive demand. Barring that, only a new variant launch with attractive mix of features and pricing could turn the industry back to a path of growing profitability.

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