LEASING A MAJOR CONTRIBUTOR TO ROBUST GROWTH IN AUTO SECTOR

In auto financing, the increase in consumer credit has resulted in increase in the demand for cars.

By SABEEN IBRAHIM
Jan 02 - 08, 2006

The market appetite coupled with liberalised financial policy introduced by the present government has produced surprising results portraying glimpses of economic turnaround in Pakistan.

Another factor which lent a strong helping hand to the gigantic demand growth in the auto sector is of course the lower interest rates - a great attraction for the booming consumer market especially a mushroom growth in the leasing business.

In the case of car leasing, the vehicle is registered in the name of the bank and the original papers are also in the name of the bank, which are held by the bank. In car financing the borrower is given a loan to purchase a car which is registered in his name.

In auto financing, the increase in consumer credit has resulted in increase in the demand for cars. It is common knowledge and it doesn't require a rocket scientist to understand that auto financing or advancing loans for household items mean financing the consumption, as this does not add to the national assets that create employment prospects.

Car financing by the banking sector has given an unprecedented boost to the auto industry and made it easier for the common man to have easy access to their fantasized brand-new car.

In the past four years, domestic banks have provided massive amounts of loans for car-financing, changing the culture, and rolling out thousands of new models of cars. According to the State Bank of Pakistan's annual report, the FY-05 was particularly significant as consumer financing increased by approximately 100 per cent, which was the highest among all sectors. Personal loans and auto loans accounted for majority of the growth in consumer finance with former constituting 45 per cent and the later 32 per cent of the total consumer loans of Rs. 206 billion on June 30, 2005. According to the report auto loans have rapidly grown by 318 per cent since June 2002 as the banks have extended a sizable credit of 66 billion rupees just for car-financing since June 2002.

Information accumulated shows that the banks' involvement in car-financing has been a blessing for all the social strata of society. Now people are able to purchase brand new cars of their choice, by paying just the down-payment through banks.

Car-financing has opened new avenues for demand of brand new cars and a person, who can afford to pay 6,000 to 15,000 monthly instalments, is able to acquire a new car. Thus the demand for new cars is steadily on the increase.

The automobile industry has continued its growth momentum as the demand in the auto sector is spurred by low interest rates in the financial markets, a persistent inflow of home remittances, cheaper and easy availability of car financing and frequent model changes induced by furious competition in the car industry.

The increased liquidity with the banks and lower interest rates - single digit against double digit - has resulted in attracting car financing schemes by financial institutions. The industry is supported by a number of new models introduced over the last couple of years, in all categories of cars, and increase in foreign remittances, which played major role in the growth of the automotive sector. The automobile market showed impressive growth; cars grew by 50.2%, motorcycles 36.6%, tractors 17.5% and buses/trucks 57.1% over the same period.

The economy of the country is maintaining a robust growth leading to an increase in the income of the people and this element will continue to give a boost to the demand for cars in the years to come.

The automobile industry has increased tremendously during the last three years. Car production has gone up, the auto parts industry has now invested a billion rupees in expanding its capacity and for the first time they are exporting their products. Credit and monetary policy will push aggregate demand through consumer goods, housing and the auto industry.

No doubt almost all the major automobile companies have gone into expansion of their production capacity obviously on the back of growing demand, here we are citing the example of Dewan Farooque Motors Limited - one of the most successful companies in the automotive industry of Pakistan.

During the previous fiscal year the company achieved the milestone of being Pakistan's fastest company to achieve the production and sales of first 50,000 vehicles within 63 months of its plant inauguration.

DFML is affiliated with KIA and Hyundai brands of Korea. During the current year, DFML's management has taken a strategic decision to separate its dealership networks for the Hundai and Kia brands by separating dealership outlets to become more focused towards each brand.

The company is also venturing into the high-end CBU vehicles business. In this regard, currently DFML is focusing on Hyundai-made vehicles. The company has planned to introduce three new CBUs - Hyundai Coupe, Hyundai Sonata and Hyundai Terracan. Hyundai Coupe and Hyundai Sonata are variants to DFML's commercial vehicle class, whereas Hyundai Terracan is the replica for Kia Sportage in the Sports Utility Vehicle (SUV) class.

According to the data released by the Pakistan Automotive Manufacturers Association (PAMA), Dewan Farooque Motors (DFML) has produced 6,070 vehicles and sold 5,864 vehicles during the first five months of FY06 (July - November 2005).

DFML earnings during the period July-September 2005 posted a marginal increment of 3% to Rs39m as against Rs38m previously. The sales volume of the company stood at 3,103 units, 3% lower compared to 3,209 units sold during the same period last year. Sales figures of the company also depicted a 2% decline to Rs1, 679million compared to Rs1, 721million last year. The major reason behind this decline is the shrinking of DFML's product line to just two products Shahzor and Santro.

However, the gross margins of the company remained intact due to 5% decline in the cost of sales to Rs1,473m as against Rs1,546million previously. Higher administrative charges restricted the growth in the bottom line. Administrative and general expenses increased by 63% to Rs59million, thereby restricting the operating profit to depict an increment of 7% to Rs101m as against Rs95m previously. Other income of the company declined by 52%, while operating expenses remained intact at Rs3m. On the other hand, financial charges increased by 28% to Rs42million compared to Rs33million during the same period last year. However, 4.9pps decline in the effective tax rate of the company boded favourably to the bottom line.