Nov 15 - 21, 20

Having touched record high level in 2008, automobile sales have not attained the same level in last two years. In fact, a strange phenomenon has been observed; sales of higher engine capacity cars have been robust, whereas sales of low engine capacity cars have remained subdued. When one tries to find out the reason, the finding is simple rich is becoming richer - high engine capacity cars are sold on cash and premium is also high due to slightly longer delivery period.

The reasons for robust sales of 1,300cc and above engine capacity cars are 1) certain segments of rural population enjoying very high come and 2) purchase of cars for the government officials, minister, advisors, and elected representatives. The buyers make cash payment. These buyers are least deterred by rising prices of car. In fact, this class of customers also suffers from the obsession of changing car model almost every year.

Rising prices of automobiles is often attributed to 1) Yen getting stronger and 2) rising steel prices. However, analysts often ignore one of the prime reasons of low capacity utilisation. According to industry experts, at present assembly units are working below 50 percent capacity utilisation. The prevailing situation has affected the local manufacturers of parts and accessories the most. Hundred of units have been closed and thousands of employees rendered jobless.

Some of the experts believe that local assemblers are minting money and suggest opening up of import of used cars an easy remedy. However, they seem to be looking on one side of the coin. They completely ignore other factors like 1) adverse impact on local automobile industry and 2) rise in import bill of completely built units (CBUs) as well as spare parts. Local industry is already working on low capacity utilisation and allowing import of secondhand vehicles would further reduce their sales. Secondhand vehicles imported during the regime of Shaukat Aziz, on the insistence of groups having vested interest, are still parked in open and rusting but huge foreign exchange wasted on the import of these vehicles.

According to a report by BMA Capital, the dynamics of auto industry in Pakistan currently portray a very different picture when compared to FY10. The key factors responsible for this change include Rupee depreciation of eight percent during the current financial year thereby increasing cost of production while floods in the country affecting the demand for automobiles at the same time. Going forward, analysts expect FY11 to post a 20 percent YoY decline in automobile sales due to 1) lower agricultural incomes and depressed demand from the flood-affected regions, 2) higher interest rates and 3) poor law and order situation in the country.

Exchange rate movements in US Dollar and Japanese Yen directly affect costs and margins of auto assemblers. Rapid depreciation of the currency has therefore forced the auto assemblers to increase prices of their products repeatedly during the year while further weakening of the currency cannot be ruled out. However, if the cycle of currency weakening and price increases continue going forward the domestic demand is likely suffer even more.

Additionally, commodity prices in the international markets are spiraling upwards including Arab Light which touched a high of US$86/barrel on November 05, 2010. Similarly, in the domestic market diesel and petrol prices have increased by 8.8 percent and 7.4 percent during current financial year respectively. Analysts forecast the trend in petrol prices to continue thereby adversely affecting demand for automobiles in the country.

These factors compel the analysts to revise valuations for leading scrips of automobile industry. Industry sales dropped by 21 percent QoQ to 33,496 units in 1QFY11 compared to 42,389 units in 4QFY10 with Indus Motors and Pak Suzuki sales dropping by 26 percent and 18 percent QoQ respectively. A decline in unit sales combined with an increase in costs led to a drop in margins during 1QFY11. Indus showed a drop in the company's gross margin to 6.7 percent from 8.5 percent in 1QFY10 and 4QFY10 while Pak Suzuki also posted a lower margin of 2.9 percent during the outgoing quarter compared to 4.7 percent recorded in the preceding quarter.

Analysts forecast Indus to post a profit after tax of Rs2,557 million (EPS: Rs32.5) for FY11, down from previous estimate of Rs2,873 million (EPS: Rs36.5). Pak Suzuki is expected to post net profit of Rs487 million (EPS: Rs5.91) for CY10. The company has so far fared well on CY basis with its unit sales up 63 percent YoY during 9MCY10 while 4Q is likely to book gain of Rs26 million (EPS: Rs0.31) on account of reversal in turnover tax to 0.5 percent. However, CY11 would be challenging.


Auto sales are likely to remain subdued in the near future. Import of secondhand cars could further mar the outlook. The measures having the potential to enhance sales are 1) reduction in interest rate charged on auto finance and 2) willingness of the financial institutions to extend auto financing. It would also be in the interest of the assemblers to abstain from frequent hike in prices. The government of Pakistan should also make it mandatory for the local assemblers to export five percent of the total production at least.