Elixir Securities Limited – Elixir Insight

Karachi, December 12, 2017 (PPI-OT): Automobile Assemblers – November Sales Down 9% Sequentially

Automobile Sales for the month of Nov-17 fell 9% sequentially but increased 4% YoY as the year-end effect kicked in. However the overall 5MFY18 performance remained strong, up 22% YoY.

During the outgoing month, passenger car sales rose 8% YoY but fell 11% MoM buoyed by weakness in the 1000cc and below segment. Meanwhile Jeeps continued strong performance owing to relatively new models rising 7%/63x MoM/YoY.

HCAR outperformed its competitors with sales up 44% YoY due to strong performance of the Honda BRV. For comparison INDU and PSMC sales rose 4/-1% and -18/20% MoM/YoY.

Despite potential upside to Target Prices, we maintain a Market weight stance on the Automobile sector because of the ongoing themes of PKR depreciation and reversal in interest rate cycle which can negatively impact margins and auto demand. However we recognize that the waiting time of 2-6 months will likely act as a lag in the translation of these variables onto the automobile companies.

1000cc and Below Segment Drags Passenger Car Sales: As per the latest automobile sales numbers released by Pakistan Automotive Manufacturers Association (PAMA), passenger car sales for the month of Nov-17 clocked in at 17,233 units down 11% MoM but up 8% YoY. The sequential decline in the segment was led by the 1000cc sub category which shrunk 30% during the period owing to 39% MoM fall in the sales of Suzuki Wagon R.

The recent popularity of ride hailing services in Pakistan has resulted in robust growth in the smaller car segment with 1000c segment up 62% YoY over 5MFY18 while the softness in sales during the outgoing month may be attributed to saturation in the ride hailing services market and the yearend effect.

BRV Drives Honda Gains: Honda Atlas Cars (HCAR) outperformed its peers during Nov-17 with sales up 44% YoY led by strong BRV sales of 1,248 units as the product did not form a part of the company’s offering during SPLY. The demand for the Honda City/Civic duo stagnated during the outgoing month, down 6% sequentially but up 4% YoY.

Indus Motors Company (INDU) continued to face its chronic supply side constraints which restricted its volumetric growth to 4% MoM. However the auto assembler did undergo a change in product mix as Toyota Corolla sales increased 8% sequentially while Hilux and Fortuner declined 6% and 17% MoM respectively. INDU remains on path to overcome its production limitations with the paint shop debottlenecking expected to come online by 4QFY18.

Following strong volumetric sales of 13,714 units in Oct-17, Pak Suzuki (PSMC) could not achieve the same levels with offtakes down 18% MoM but up 20% YoY in Nov-17.

The assembler witnessed a sequential decline in all products with most alarming being the decline in Suzuki Wagon R which had previously been the growth driver for the company. However, PSMC has recently launched the automatic transmission variant of the Suzuki Cultus, and Mega Carry Truck which will likely boost the company’s sales moving ahead.

Long Delivery Period to Provide Buffer from Downturn in Economic Cycle: We maintain a Market weight stance on the automobile sector of Pakistan owing to the ongoing theme of reversal in economic cycle. Almost 40% sales of the sector are financed through bank borrowing and therefore the sector may see a downturn in demand if interest rates rise significantly from current levels. The current waiting period for sedans range from 2-6 months and will likely act as a lag period before the translation of these factors on demand.

Concurrently PKR depreciation will increase the company’s cost due to high import component which can put downward pressure on margins. However we identify that the sector does enjoy significant pricing power and can pass along higher costs to defend margins.

Within the sector, we maintain a Buy call on INDU where the company’s upcoming debottlenecking will act as an upside trigger by allowing it to boost volumetric sales which are currently capped by capacity constraints and also reduce finance cost on late deliveries as the company will be able to service customers faster. Our Jun-18 PT of PKR 2,140/sh offers a potential total upside of 35% from yesterday’s closing price which includes a forward dividend yield of 8%.

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