Oct 20 - 26, 2008

During first quarter of the current financial year auto sales have reduced by nearly half compared to the figure of same period of last financial year. Poor capacity utilization is already having a toll on the assemblers but worst hits are the manufacturers of parts and accessories.

Reduction in sales is also affecting financial sector, facing double edged sword, declining disbursement of auto financing and rising delinquency. There seems no immediate solution and the problem is expected to aggravate further once additional capacities come on line.

According to the latest numbers released by the Pakistan Automotive Manufacturers Association (PAMA) for September the overall sales (cars + LCVs) were recorded at 27,200 units compared to 48,600 units in the same period last year, a decline of 44%YoY.

Car sales were declined by 50%YoY to 22,000 units in 1QFY09, whereas LCV sales maintained their single digit growth at 6%YoY during the same period. In view of liquidity issues coupled with overall economic slowdown in the country, auto sales have been directly impacted which is evident from the sharp decline in sales volume.

The combined profitability of the three largest auto assembling companies (PSMC, HCAR and INDU) has declined by 61%YoY during 4QFY08. This has primarily been on the back of a 6%YoY decline in sales despite a 5-10% price increase by all three manufacturers. Moreover, a 7 percent YoY decline in gross margin on the back of cost escalations coupled with the slowdown in sales volume has led to the sector woes.

With financing costs expected to remain on the high side experts do not foresee revival of sales volume during the current fiscal year. However, sales volume can bounce back if the central bank eases its monetary policy stance. At the same time, stabilization of the exchange rate and the pullback in international steel prices should further provide impetus to growth in profit after tax in the days to come, should all other remain in favor of the assemblers.

With overall auto sales volume expected to remain depressed, sector profitability should remain lackluster during FY09. Besides HCAR expected to post growth in earnings due to a significantly low base in the previous year, PSMC and INDU are both expected to report decline in earnings.

The GoP has imposed tax on import of all luxury items in the range of 15-50%. This should slowdown the import of used luxury cars into the country. Even though this carries little importance for PSMC, HCAR and INDU they could potentially get benefit as the price of imports they are competing against gets pushed up higher. Not only should this provide a cushion to sales volume, but it should also provide local manufacturers some room for margin expansion.

Even though the depreciation of the Rupee has played a pivotal role in dictating the decline in gross margins, not all has been negative. The higher value of the Japanese Yen against the Rupee has meant that all cars being imported from Japan are now relatively more expensive in Rupee terms. This in turn has meant that imported cars have lost their competitive pricing edge against locally manufactured vehicles. With sales volume coming under pressure profitability margins are expected to remain depressed.

INDU has recorded sales volume of 2,600 units during 2MFY09 compared to 9,500 units in the same period last year, a decline of 72%YoY. Sales volume for Toyota Corolla and Daihatsu Coure posted declines of 91%YoY and 22%YoY respectively. The sharp decline in Corolla sales has primarily been due to phasing out of the previous model. With deliveries of the new model of Toyota Corolla underway, sales are expected to pick up significantly September í08 onwards. Furthermore, with a lower grade of the new Toyota Corolla likely to be launched within 2008, sales volume should post impressive QoQ growth during 2QFY09.

Coming from a low base, HCAR has outperformed both INDU and PSMC in terms of sales volume by posting a decline of 34%YoY during 2MFY09. The company recorded sales volume of 2,100 units during Jul-Augí08 compared to 3,200 units in the same period last year, with Honda Civic and Honda City contributing with 23%YoY and 39%YoY decline in sales volume respectively. However, HCAR's history of making timely minor modifications to their product lineup to keep customer interest intact is likely to keep sales volume at current levels. Moreover, this would also allow minor increments in price each time changes are made, consequently providing support to gross margin.

The largest auto manufacturer in Pakistan has also borne the brunt of economic slowdown and cost escalations. However, its market leader position in the sector along with its well diversified product portfolio has allowed the company to outperform average sector drawback by posting a decline of 40%YoY during 2MFY09 despite a two-week plant shutdown during July'08. The company has witnessed YoY decline across its entire product base in the range of 22-83% during Jul-Augustí08, with Suzuki Ravi being the only exception - posting a healthy 74%YoY growth in sales volume during the same period. The company's strong position in the CNG segment should allow it to benefit the most from the severe hike in fuel prices.

International steel prices have come off by 2% since the start of FY09 after increasing by almost 36% since January '08. Going forward steel prices are expected to remain range bound.

The 1300-1800cc continues to be the biggest laggard, recording a 74%YoY decline in sales volume during 2MFY09, largely on the back of phasing out of the older model of Toyota Corolla. The 800-100cc segment came in second last with a 51%YoY decline in volumes whereas the LCV segment was the only saving grace with a 4%YoY growth during this period.