JS Securities Limited – Morning Briefing

Karachi, March 08, 2019 (PPI-OT): Non-filers cheer; however, reasons exist for assemblers to fear

Total passenger car and LCV sales during February are set to decline by 11% YoY to an estimated 20,250 units.

Possibly, in next 2-3 months, one factor that could add pressure to volumes of the three OEMs is customers delaying purchase in wait of upcoming cars in local auto space (Kia/Hyundai models and new Alto).

The decision to allow non-filers to purchase new cars is better than expected as it is across all engine sizes, whereas, the restriction is still there for imported CBUs.

INDU is expected to post 8% YoY growth during the month, whereas PSMC and HCAR could post declines of 17% YoY and 12% YoY, respectively.

Auto sales to decline 11% YoY in Feb-2019

Looking at provisional statistics for automobile assemblers for February 2019, total passenger car and LCV sales during the month are set to decline by 11% YoY to an estimated 20,250 units. Reasons for the decline in volumes are well documented, i.e. price increases in the range of ~15-25% over the past 15 months stretching customers’ demand, the restriction on non-filers, costlier financing as mark-up rates increase, etc. Possibly, within the next 2-3 months or so, another factor that could add pressure to volumes of the three major OEMs is customers holding off purchases in anticipation of new cars in the local auto space by companies such as Kia (expected in 1HFY20) and Hyundai (2HFY20).

For instance, Indus Motor’s (INDU) Corolla average three monthly sales prior to the launch of 11th Generation Corolla dropped by 49% YoY, whereas Honda Atlas (HCAR) witnessed a 7% YoY decline prior to the launch of the new Civic (the decline was significantly greater in Civic, however PAMA had begun to record cumulative Civic and City sales rather than separately). Moreover, Pak Suzuki (PSMC) is expected to launch the new Alto by June or July this year, which could also reflect in performance of variants such as Wagon-R, where a chunk of demand for the latter stems from ride hailing companies, and customers might choose to await for the cheaper and more fuel-efficient Alto.

Recent finance amendment bill to spur volumetric growth

Notwithstanding the above discussion, some impetus is expected to originate from the recent decision by the government to lift the restriction on non-filers from purchase of new and locally manufactured vehicles. It was a widespread belief that non-filers would be permitted to buy only vehicles up to 800cc as was being circulated in media reports. Surprisingly, the restriction was completely lifted for all engine sizes. In fact, when compared to the period before the budget in April-2018 (when this condition was announced), this time it is even better for local OEMs. This is because prior the budget announcement, non-filers could purchase locally assembled cars as well as imported CBUs. Now, the condition still holds for unregistered imported CBUs, whereas it no longer holds for local cars.

However, the imposition of 10% FED on engine sizes above 1,700cc has negative implications for volumes of INDU’s Altis Grande and HCAR’s Civic. For HCAR, this is particularly troublesome, given that Civic contributes over 40% of revenues, whereas the 1,700+ variants for INDU have a significantly lower contribution to revenues by comparison. One respite for HCAR is that sales for the recently re- launched 1,500cc Civic Turbo variant might increase as the spread in prices of the cheaper 1,800cc Civic and the 1,500 Turbo will decrease as the company increases prices of the 1,800cc variant to transfer the additional cost of FED to end consumer.

INDU sales stay strong in Feb; PSMC and HCAR decline

Looking at company-wise data, INDU continues to stay a cut above the rest in terms of unit sales with expected 8% YoY growth in Feb-2019. As we had mentioned in our previous reports (also corroborated later by INDU’s management in their corporate briefing), the increase in Corolla volumes in FY19 so far is due to steps taken earlier regarding promoting genuine buyers, while clamping down on profiteers, resulting in lower lead times.

In future months, we believe the decision to lift restrictions on non-filers will spur demand for Fortuner sales (despite the 10% FED imposition), where sales could increase from an average of ~250 units per month in recent months to ~300 per month (where previously they were averaging 400/month prior to the non-filer restriction). PSMC sales could continue to suffer (down 17% YoY) due to the non-filer restriction and higher prices affecting a more price-elastic customer base. For HCAR, volumes could fall by 12% YoY on the back of falling demand for BR-V sales, whereas City sales could also witness a slowdown among urban customers amid higher auto financing rates. Finally, tractor demand looks to remain muted due to higher prices following rupee devaluation.

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