Tuesday, 8 October 2013

Car Assemblers: FY14 Volumes Growth Revised To 6%

Car assemblers in Pakistan have borne a lot in last fiscal year due to significant imports of used cars, EURO-II Compliance etc. Further, increased costs coupled with inability to timely pass on the cost kept hurting earnings of these companies. Resultantly, volumes and profitability of 3 major car assemblers (PSMC, INDU, HCAR) declined by 24% and 10% in FY13, respectively. Initially, we were of the view that car sales of local assemblers will grow by 20% in FY14. However, considering higher taxes, rising inflation and slower economic growth projections, we believe that volumetric growth will remain restricted to around 6%. Recent hike in car prices along with already incorporated increased taxes is likely to hurt the purchasing power of the buyers going forward. We are firm on our thinking that profits will be healthy for car assemblers in FY14. We believe that the weakness in JPY will be the major input in the growth in addition to efforts to maintain high gross margins by increasing prices. In 1QFY14, we expect that growth in Passenger Cars & LCV sales of local assemblers may remain at 8.4% YoY to 33k units.

Rising Car Prices And Inflation To Affect Sales
FY13 started with a negative note of depressed sales due to completion of taxi scheme, Euro-II Compliance and CNG kits ban. To recall, PSMC and INDU had to terminate ‘ALTO’ and ‘COURE’ to comply with government regulation of Euro-II Compliance. Further, huge inventory of imported used cars in the market also provided fierce competition to the local assemblers. In FY13, country imported about 46k units. Initially, we were of the view that demand of local car assemblers will grow by 20% in FY14 on the back of slower used car imports, expected economic recovery and reviving auto financing. We still believe that buyers will divert back to local assemblers in FY14 as government has reduced the age limit of imported used cars from 5 to 3 years which has effectively increase prices of cars. However, expectations of rising interest rates in FY14, CPI higher than budget target along with slower economic growth projections are expected to affect demand negatively. For FY14, we expect volumetric growth of locally assembled cars may remain restricted to 6% to 143k. Individually, we expect 77K units for PSMC, 40K units for INDU and 25k units for HCAR in FY14.

2014 Projected EPS: INDU RS52.6, PSMC Rs21.2
Though we have revised down our volumetric growth targets, we are still firm on growth in profits of Car Assembler. Prime impetus to the growth is likely to be provided by declining JPY which has increased margins of these companies. Further, strategy to timely pass on cost pressure to keep margins healthily is also likely to help profits. For INDU, we expect revenues growth of 8% to Rs69bn along with the 125bps improvement in gross margins to 10.5%.  We expect profit of INDU will increase by 23% to Rs4.1bn (EPS Rs52.6) in FY14. For 2013, against 16% expected decline in PSMC revenues to Rs48.9bn, we expect 2014 revenues will increase by 11%. On margins side, we expect that 5.9% gross margin of 2013 may remain stable at 5.8% in 2014. We expect PSMC to post profits of Rs1.8bn (EPS Rs22.2) in 2013 which may decline to Rs1.7bn (EPS Rs21.2) in 2014. To recall, 2013 profits include onetime gain of Rs275mn (Rs 3.3 per share) on old motor cycle plant sale. We cover PSMC and INDU in auto sector and maintain market weight stance on the scrips with the target prices of Rs140 and Rs325, respectively.

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