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Auto sector performance and outlook

Reportedly, utilization capacity, on stated double shift capacity basis of major OEMs for CY19 declined as compared to CY18 as the industry dealt with a hampered demand outlook, specifically as consumers suffered from ‘sticker-shock’ over rabid price hikes. The lessons for CY20 remain the persistence of the ‘new model effect’, witnessed in CY19 segment-wise sales, likely to play out in the case of INDU. Moreover, improvements in purchasing power, either from monetary loosening or relative rupee stability, accompanied by tax concessions for consumers (removal of FED) could catalyze demand in the coming year.

CY19 total industry sales of 191,085 units, down by nearly 28%YoY) consisted of 161,004 passenger cars (PC), 25,025 LCVs, 4,294 trucks and 762 bus units, marking the single largest decline since CY08, taking annual unit sales back five years to CY14-15 levels. PC sales were increasingly reliant on modest slippages in low-mid segment vehicle market (800CC/1000CC segments as opposed to drastic declines in the premium 1300CC plus segment.

The pleasant surprise was that car sales went up by 23%MoM to 12,100 units in December 2019. The rise was largely led by 49%MoM increase in sales of Pak Suzuki Motor Company (PSMC). The other two major manufacturers, Indus Motor (INDU) and Honda Car (HCAR) sales dropped by 12%MoM and 23%MoM respectively.

The increase in sales of PSMC was largely driven by the announcement of increase in car prices by the manufacturer in mid of December 2019, which was scheduled to become effective from 1st January 2020. The decline reported by the other manufacturers was largely in line with the historical year-end phenomenon, where consumers generally delay their purchases until the New Year.

On a YoY basis, weak demand dynamics was again evident from a 38%YoY fall in sales in Dec-2019, taking 1HFY20 decline to 44% YoY. This is primarily attributable to 1) higher car prices mainly due to Pak rupee deprecation and 2) higher interest rates.

PSMC sales were down 26%YoY in December 2019, while INDU’s sales declined by 56%YoY with Corolla sales falling by 50%YoY. HCAR sales fell by 58%YoY during the month under review with combined sales of City and Civic declining by 56%YoY.

Sale of motorcycles by Atlas Honda (ATLH) witnessed an increase of 6%YoY as sales rose to 85,000 units. However, it recorded a decline of 11%MoM.

Tractor sales recorded a growth of 75%YoY with Millat Tractor (MTL) sales rising by 175%YoY. On the MoM basis, overall tractor sales were down 37%MoM.

 

INDU sales for December 2019 were reported at 2,332 units (down 12%MoM and 56%YoY), marking a year of drastic declines (7 months of sequential decline), with the last six months showcasing a worsening trend, as July 2019 onwards price hikes seemed to have materially pushed demand propensity for the Corolla. In 4X4 segment offtake remained meager, with Fortuner/Hilux sales for CY19 down to 1,908 and 4,523 respectively.

PSMC sold 8,732 units up 49%MoM but down 26%YoY) in December 2019. PSMC’s cumulative CY19 sales showcased relative resilience amongst the top three OEMS, particularly for the recently launched low-mid segment models, Cultus and new Alto. The much needed December sales uptick was mainly due to the Swift/ Wagon-R/Bolan/Alto rising 51/88/89/25%MoM, as against lower sales in November 2019. However, cumulative CY19 sales slipped to 109,858 units, down 20.4% YoY, falling from the all-time high figure for annual sales established in CY18 (excluding GoP schemes). From a cumulative standpoint, PSMC sales suffered from the phasing out of the Mehran and delayed launch of the new Alto, while LCV segment offtake (Ravi/Bolan sales fell 30.2/36.6%YoY) failed to cushion against the ongoing consumer demand slump.

CY19 was the year of persistent price hikes and rising pressures to consumer durable spending worsening the demand environment. Lessons for CY20 remain the persistence of the new model effect, where segment sales show relative strength where new models held their own, a trend likely to play out in the case of the Vios/Yaris for INDU. Additionally, general improvements in purchasing power, either from monetary loosening or relative Pak Rupee stability, accompanied by tax concessions for consumers (removal of FED) could catalyze demand in the coming year.

According to a report by Topline Securities, HCAR has announced its 3QMY20 results, with LPS reported at Rs0.29 as compared to EPS of Rs4.21 for 3QMY19. Cumulatively, earnings in 9MMY20 have been reported at Rs4.97/share, down 74%YoY. The 3QMY20 earnings have been termed below expectations on account of 1) lower than expected gross margins and 2) higher than expected financial cost. The 3QMY20 turned in losses as lower unit sales down by 66%YoY as well as lower gross margin dragged down profitability. Similarly on a QoQ basis, earnings came in under pressure due to 17%QoQ lower unit sales and lower gross margin. HCAR is observing non production days (NPDs) due to higher inventory levels amidst a weak demand outlook. In 3QMY20, NPDs reached up to 64 days as compared to 44 days in earlier quarter leading to a higher fix cost per car. The Company in 3QMY20 also recorded finance cost of Rs323 million, up 62% QoQ as it raised short term borrowings to manage its working capital requirements due to inventory pile-up. The brokerage house has flagged following risks: 1) unfavorable movement in exchange rate, 2) regulatory changes, 3) increased competition from existing and new players.

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