Elixir Securities Limited – Flash Note

Karachi, October 17, 2017 (PPI-OT): Automobile Assemblers – Watch Out for Accelerated Growth in Cultus and Wagon R

As per our channel checks, duty on imported preowned cars have been increased by 15% across all car segments as the government looks to deter imports to rectify current account balance.

The preowned market segment forms a significant part of the overall supply side dynamics of the automobile sector in Pakistan where FY17 imports of over 50,000units forms 27% of the passenger car segment. Preowned imported cars are mainly dominated by smaller cars i.e. 660cc to 1000cc.

Reiterating our call issued via Strategy Note on ECC Decisions (released on 9th October, 2017), we identify Pak Suzuki Motor Company (PSMC) as the biggest beneficiary of the move as imported preowned cars are a direct competition. The company’s surplus capacity will enable it to increase its production to meet excess demand.

We foresee this to result in higher offtakes of Suzuki Cultus and Suzuki Wagon R which have already witnessed strong growth of 56%YoY and 71%YoY respectively during 1QFY18.

While we expect the duty hike to positively impact Honda Atlas Cars (HCAR) and Indus Motor Company Limited (INDU), the effect will be limited since imported preowned cars have not been a significant competition for these companies. Moreover, their near full capacity production will limit their capacity to ramp up production in the face of shifting demand.

In the Automobile space, we identify HCAR as our top pick where our Jun-18 PT of PKR707/share offers capital upside of 37% and dividend yield of 5% against last day’s closing price.


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