SALES DECLINE TAKE TOLL ON OTHER SECTORS

EARNINGS OF BANKS, INSURANCE COMPANIES ARE UNDER PRESSURE

SHABBIR H. KAZMI
Sep 14 - 20, 2009

After having registered double-digit growth for years, automobile industry has come under pressure at present. Sales reduced to nearly half of the peak attained in the recent past. On top of this reluctance of banks in extending auto sales, rising cost of input and above all eroding purchasing power of people at large dampened auto sector outlook. The worst hit is the manufacturers of parts and accessories.

Reportedly, hundred of units either have closed or are at the verge of closure and jobs of thousands of workers are at stake. Auto sales for the first two months of the current financial year show marginal increase in sale but profitability remains under pressure.

According to a report by AKD Securities the signs of deceleration in car sales growth appeared in FY07 (9% YoY growth as compared to five year average of 32%) and then followed in FY08 (9% YoY decline). However the extent of general economic slow down was evident from sales in FY09. Decline in sales was attributed to high automobile prices, limited financing facilities, and high rate of interest. Furthermore, assemblers faced rising input cost pressure due to depreciation of Rupee, going down by over 20% against the US dollar pushing up the cost of completely knocked down (CKD) kits. However, receding cost pressure coupled with the withdrawal of 5% Federal Excise Duty (FED) on imported CKD kits allowed the automobile assemblers to reduce prices.

Apart from seasonality factor, the impact was immediately reflected in June sales registering 10% MoM increase in June 09 as compared to 1.1% decline in the earlier 11 months. The recent reduction in interest rate with further decline expectations coupled with price reduction is likely to provide some impetus to the sector.

Sales of cars and light commercial vehicles declined to less than 100,000 units in FY09. Sales of 1000cc and 800cc suffered the most with off take decline by 67% and 57% YoY respectively. However, sale of 1300cc and above cars was less affected registering a decline of 24% YoY during this period.

In a heavily import dependent industry cost is directly depended on exchange party, which also affects margins. While Rupee value eroded significantly against dollar, parity against Japanese Yen remained rather stable registering less than half a percent decline. With sizeable inflow of foreign exchange from multilateral institutions, outlook for exchange rate looks stable. However, widening trade deficit gap and rising oil prices are likely to keep exchange rate under pressure.

There cannot be any doubt that in the recent past auto financing played a key role in boosting automotive sales. As the central bank decided to keep interest rate high in an attempt to contain inflation, car sales came under pressure. However, recent reduction in discount rate revived hopes but outlook has once again been marred because experts do not expect further and substantial cut in lending pressure due to the IMF conditionalities.

Analysts are also of the view that those financial institutions, which were hit hard in the past due to rising default, may not be keen in further disbursement but others may still be keen in taking advantage of the latest demand. Substantial decline in the sales of less than 1000cc cars is also linked to rising prices of motor gasoline and CNG.

The other indicators of the market pulse are delivery period and premium. Reportedly, delivery period of Toyota variants is less than three months and hardly carry any premium whereas Honda variants are available with immediate delivery without any premium. However, Suzuki variants still enjoy from Rs10,000 to Rs30,000 premium.

Re-launching of Corolla has helped Indus Motor Company in improving its sales. Despite FY09 overall sales declined by nearly 30% to less than 35,000 units, the company succeeded in improving its market share to 34%. The company witnessed significant reduction in sales during 1QFY09 but got a big boost in 2QFY09.

However, limited financing facility and high interest rate kept Cuore sales under pressure, down by more than 50% during FY09. Reduction in interest rate has the potential to affect Cuore sales positively.

Pak Suzuki Motor sales have significant share of less than 1000cc variants. The company witnessed an overall reduction of 56% in sales to nearly 51,000 units. The laggards were Cultus, Alto, and Mehan posting declines of 67%, 66% and 62% respectively. Decision of financial institution to revive auto financing can have a positive impact on the sale of these models.

SECTOR'S OUTLOOK

According to figures released by Pakistan Automobile Manufacturers Association for first two months of current financial year sales of the passenger cars and light commercial vehicles increased by 23% YoY with improvement witnessed in Indus Motor and Honda Atlas Cars while Pak Suzuki and Dewan showed decline. Total number of units sold during this period was close to 21,000 units compared to about 17,000 units during the same period last year. Monthly sales exceeded 10,000 last in October 2008 with sales of 13,289 units while in August sales touched 10,865.

Sales of passenger cars were improved by about 35% YoY to 17,950 units as against 13,316 units during the corresponding period last year. Corolla controls 35% share of passenger cars, followed by Mehran (18.72%), and Bolan (10.56%).

Pak Suzuki bounced back with good numbers in last two months and it has recaptured its lead position. Since February this year, Indus maintained its first position but in August on cumulative basis Pak Suzuki regained top position.