INTERVIEW: PAKISTAN CAN FETCH HUGE FOREX THROUGH AUTO PARTS' UNMET DEMAND OF TRACTORS
Jan 25 - 31, 2010
The inflationary pressure, unfavourable economic conditions, declining purchasing power of the middle-income population, high-cost of production due to depreciation of Pak rupee and other problems have posed manifold problems to the auto sector.
On the other hand, the tractors manufacturers in the country are still registering profits due to rising demand. There is a huge demand of tractors from the farming fraternity. Around, 218,607 applications were submitted under the Green Tractor Scheme. Out of which only 10,000 were accepted.
The existing credit structure as provided by the Zarai Taraqiyati Bank Limited (ZTBL) and various government-sponsored schemes like the Green Tractor Scheme and Benazir Bhutto Scheme are unfortunately not enough to satisfy the demands of agriculture sector.
During the period of Jul-Sep 2009, Al-Ghazi Tractors produced 6,763 tractors, reaching a total production of 22,396 tractors, compared with 20,003 units produced during the same period last year.
For the first three quarters of the year 2009 (Jan-Sep), the company sold 23,770 tractors compared with 19,996 tractors during the same period last year. On sales of 23,770 tractors during the first three quarters of 2009, the company earned a pre-tax profit of Rs 1.877 billion, compared to Rs 1.437 billion during the same period last year. Sales increased by 44% to Rs 11,351 million, while the cost of goods sold increased by 46%.
Country's auto sector had registered a significant growth spurt in 2002-2006, but the auto sector is in a slump which began in the financial 2007-08 when total vehicle sales fell by 6.2%. The downturn carried over into FY09, with sales for the first half of the year (July to December 2008) down by 48% year-on-year to 52,927 units for cars and light commercial vehicles (LCVs), while compared with November, sales for December were down 55%.
With five carmakers, the Pak automotive industry is relatively small which was hit hard due to economic slowdown. There is continuous decline in sale of cars due to high prices.
The poor state of the Pak auto industry is reflected in BMI's Business Environment Rating for the automotive industry in Asia Pacific, in which Pakistan is in last place on a score of 42.4 out of a possible 100. The market is held back by low production growth potential and an average rating for sales growth. However, as a signatory to the Trade Related Intellectual Property Rights Agreement (TRIPS) under the auspices of the World Trade Organization (WTO), the country's regulatory environment scores well.
With just a handful of manufacturers, Pakistan's competitive landscape remains narrow. Japanese car manufacturers control most of the country's passenger car production and sales. Figures for FY08 show that Suzuki-brand models represented 62% of total Pakistani passenger car production and 51.7% of sales.
Toyota is gaining, however, with Corolla becoming the country's best-selling model in the first half of FY09.
Experts told Page that the auto industry is currently faced with a number of problems. There is increased competition from imported cars and importantly used cars. This is threatening the future domestic sales of new cars in the country.
According to them, the inflationary pressure and unfavourable economic conditions are decreasing the purchasing power of the middle-income population and thus hampering demand. Cost of imports has also increased due to rupee depreciation. Sales of new vehicles in Pakistan underwent a decline of 34% y-o-y in fiscal year 2008/09, with total sales registered at 163,479, compared to 247,160 in fiscal year 2007/08. Although data from the Pakistan Automotive Manufacturers Association (PAMA) for July 2009 shows a rise in sales of passenger cars and light commercial vehicles of 33% y-o-y (to a total of 9,896 units), but later on continuous decline was noticed.
Market sources claimed that some of the local car assemblers have raised the prices of their vehicles at least 4 times to maintain their profit margin amid all time low demand, which is totally unfair. "Prices of automobiles have slumped all over the world including the US, Japan, South Africa and England to attract buyers, but the situation in our country is different," they added.
The government must reduce the taxes on imported vehicles so that automobile importers could give tough competition to local car assemblers and this will definitely favor the public. Importers are paying 262 per cent overall duties, which were 130 per cent a few months ago. The people will benefit, if taxes on imported vehicles are slashed, a car dealer Usman said. Competition Commission of Pakistan (CCP) has already recommended to the government to allow imports of both new and used cars to promote competition in the automobile industry.
Ahmed Qadir of CCP recommended import of new and old cars in all categories and change in market supply chain structure. "The auto industry must move from a reactive demand-based model to a just-in-time supply based model, which is international best practice and consumer friendly," he said.
The auto sector-specific CCP's study pointed out that car manufacturers' prices and production fall and rise at the same time. Keeping in view this trend, there is a need to closely monitor this sector to check whether it was being done deliberately, or economic factors were involved in such phenomenon. He raised a question, saying: "Do car manufacturers raise their prices in tandem?" The CCP study claimed to have found that the automobile industry was facing the problem of low volumes/under utilisation of capacity, high prices, late delivery, premium, and slow transfer of technology. "The need for competition is much more pronounced now than ever before, to keep the industry afloat," Ahmed observed.
The CCP also pointed out that car production target for 2012 was envisaged at 500,000 units, and this target was unlikely to be achieved, keeping in view the existing situation of the sector. The commission's analysis showed that total $1.5 billion investment was made in this sector by providing 192,000 jobs, and the auto sector paid around Rs 63 billion in the form of duties and taxes. Experts believe that fluctuation in interest rates was interlinked with the growth of the auto industry. They said data shows that the car leasing/financing also played a major role for achieving higher growth number of this sector during 2003-04 till 2006-07. "Car financing was increased to Rs 120 billion in 2006-07 from less than one billion till 1999-2000. Reduction in average mark-up rate on car financing also played a key role in rampant sales of cars. Average markup rate was 23 percent by 1998-99 which declined significantly to around 6 to 7 percent by 2006-07.
That also gave boost to lease financing of cars. The capacity of car assemblers, was also increased to 200,000 units during 2006-07 which now again came down to 120,000 per annum," they said. They added that hike in prices of cars was directly linked with devaluation of exchange rate in terms of depreciation of rupee against US dollar.
ENGRO has posted a profit after tax of PKR3,957.25m (EPS: PKR14.08) for the year ended December 31, 2009 and announced a cash dividend @20% or PKR2.0 per share along with 10% bonus share.
Engro Corporation Outstanding Shares
YOY Growth QoQ Change FY09 FY08 Change% 4QFY09
Change% PAT (PKR Billion) 3,957.25 4,240.43 -7% 2,401.39 1,555.87 54% EPS PKR (Actual) 14.08 16.81 -16% 8.86 5.22 70% EPS PKR (Diluted)* 13.28 14.23 -7% 8.06 5.22 54% Payout (4Qtr- Oct-Dec) 20%C 10%B 20%C 40%R . . . . *Profit after tax/ outstanding shares