PAKISTAN'S AUTOMOBILE MARKET
May 11 - 17, 2009
The overall sales of the locally assembled Passenger Cars (PC) and Light Commercial Vehicles (LCV) dropped 56% to 20,856 units primarily due to economic slowdown, high rate of interest and lack of interest of the banking sector towards car financing.
It may be recalled that during the same period previous year the automobile industry sold 47,638 units that indicated the tough situation faced by the auto industry in Pakistan. On nine months year to date basis, the sales volume was down 46% to 73,910 units as against 136,587 units sold in the corresponding period of the previous year.
The permission to import new or used cars looks strange especially when the economic conditions do not permit to spend the hard earned foreign exchange on the import of luxury items including cars besides the local auto industry is quite capable to cater to the market needs in Pakistan. In fact the situation calls for immediate ban on import of cars to protect the local industry as well as economy of the country.
It is interesting the note that the auto industry in neighboring India has planned for complete localization of the cars with a view to reduce cost as well as to save the foreign exchange used on the imports of component. Why Pakistan should not go for total localization of automobiles assembled in Pakistan to save the much needed foreign exchange?
OPERATING PERFORMANCE OF INDUS MOTOR
The Board of Directors of Indus Motor Company Ltd. (IMC), met on April 21, 2009 to review the company's financial and operating performance for the quarter ended March 31, 2009.
The combined sales of IMC's Toyota and Daihatsu brands for the quarter fell 27% to 9,688 units compared to 13,307 units sold for the same period last year. The Company was able to partially cushion the impact of the adverse market environment due to the power of its brand/products including strong recognition of its attributes. IMC also assumed the number one leadership position in industry on volume with a market share of 41% for the quarter ended March 2009. On nine months year to date basis, the sales volume at 23,615 units was down 35% from 36,445 units sold in the corresponding period, while the production to meet falling demand was restricted to 23,805 units versus 34,925 units produced for the same period during 2007-8.
The Company's sales revenue for the nine months ended March 31, 2009 decreased 15% to Rs 24.8 billion versus Rs 29.3 billion for the same period last year, while the profit after tax declined substantially to Rs 566 million, down 70% compared to Rs 1.9 billion posted for the corresponding period in 2008. The decline in sales volume and profitability is mainly attributable to the fall in the Rupee value against major currencies contributing to higher input costs.
At present the prime concern of the banking sector seems to be the increasing size of Non-Performing Loans (NPL) which is mainly contributed by the car financing segment of the banking sector.
The gross infected portfolio of the commercial banks to gross advances, an important ratio to gauge the flow of non performing loans, climbed to 10% as compared to 9.1% on December 31, 2008 and 6.7% at the end of March 2008.
Informed sources in the banking circles say that rising number of bad loans will be prime concern for the banking sector in the quarters to come. They added that with the revival of the economy as well as further cut in interest rates the worst may be over by the end 2009 as far as the flow of NPLs is concerned.
It is worth mentioning that with the exception of few smaller banks, Non Performing Loans (NPLs) of listed banks witnessed an increase during the first quarter 0f 2009 depicting shockwaves of the global financial turmoil as well as the high cost of financing due higher interest rates.
The gross NPLs of the banking sector stood at Rs289billion indicating an increase of Rs17billion in the first quarter ended on March 31, 2009 over the NPLs of December 2008.
For the banks around the globe and in Pakistan, the toxic assets have become the major cause of concern for the investors. In current scenario, the significance of ratios like gross NPLs/gross advances and net NPLs/net advances has increased as these ratios determine the balance sheet's health.
In fact increasing infected portfolios and provisioning thereof dilutes the impact of growth in net interest income (NII) by increasing credit cost of the banks.
The financial experts while evaluating the asset quality of all 24 listed banks which represent 92% of the banking sector's assets estimated that gross NPLs stood at Rs289billion while Gross NPLs to Gross Advances at 10% the deterioration in the banks' infected portfolio continues in to adversely affect the profit margins of the commercial banks.
It may be recalled that one year back, as on March 31, 2008, this figure was at Rs176billion. On segregated basis, Rs164billion (57%) NPLs are held under loss category, while Rs66billion (23%) and Rs52bilion (18%) are classified as doubtful and substandard, respectively.
FUTURE OUTLOOK FOR AUTOMOBILE INDUSTRY
The Company expects the last quarter April/June'09 to remain challenging in view of the economic pressures faced by the country and effects of global recession. However, there are signs of the economy stabilizing and IMC expects the demand for its vehicles to increase especially in rural areas due to the agricultural income cycle and farmer liquidity.
The Company is appreciative of the Government of Pakistan for providing some relief to the industry in terms of reducing the depreciation allowance for used cars from 2% to 1% per month and the waiver of 35% cash margin requirement. However to improve industry performance, the Government should withdraw 5% Federal Excise Duty, reduce the Withholding Tax slabs at the registration stage and initiate a dialogue with all stakeholders for renewed implementation of the AIDP (Auto Industry Development Plan).