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.

Nishat Chunian Limited Review

NCL: Result Preview FY13

Nishat Chunian Limited (NCL) is scheduled to announce its FY13 results on October 04, 2013. In today's Karachi Stock Exchange Analysis, we present a result preview for the results expected to be announced along with our recommendation on the same.

PAT to grow by 229% YoY (EPS 12.65) in FY13

We  expect  Nishat Chunian Limited (NCL)  to  post  profit  after  tax  of  Rs2,303mn  (EPS  Rs12.65)  in  FY13, showing a massive increase of 229% YoY. This colossal growth in the bottom line is expected mainly due to i) a 13%YoY increase in net sales of the company on the back of increase in spinning and weaving exports to China and Hong Kong coupled with depreciation in PKR against USD ii) gross margins are expected to improve by 520bps to 16.4% owing to low cost cotton inventory built during FY12  iii)  financial  charges  are  likely  to  decline  by  17%YoY  as  low  interest  scenario has reduced the financial burden of the company and iv) other income is also expected to post a 31%YoY increase on the back of rise in dividend income from  its  subsidiaries.  We  expect  payout  of  Rs4.0/share  to  be  declared  along with  FY13  results.

However,  in  4QFY13,  the  company  is  expected  to  post  a  profit  after  tax  of Rs580mn (EPS Rs3.19), registering a decline of 21%QoQ.  The top line though is expected  to  depict  essentially  a  flat  trend  (increasing  by 3%  QoQ),  the  other income  is  expected  to  be  the  main  culprit  for  the  turn  down  in  bottom line, falling by 62% QoQ, due to the absence of dividend income from its subsidiary, NCPL.

Recommendation 'Hold' with Dec-13 TP of Rs61/share

At current levels, the scrip is trading at a discount of 2.5% to our Dec-13 TP of Rs61/sh. We recommend 'Hold' on Nishat Chunian Limited (NCL).

FBR’s GST Rate Hike Move, More Than Meets The Eye!

The Federal Board of Revenue increased GST by 2% to 19% on several items. Existing GST rate is 17%. Although apparently this move seems to additionally burden the masses but upon analyzing the move with some depth we feel that this move might in fact bode well on a macroeconomic level.

 

Under the current scenario where General Sales Tax (GST) is levied on the retail price, the onus lies on the distributor to both collect GST from the consumer and pass on to the respective authorities. Considering that a large number of these distributors are not tax registered therefore tax collection remains abysmally low.

On the other hand under the proposed move despite increase in the GST rate by 2%, we anticipate the tax levied to be lower because now the tax would be levied on the factory price which is notably lower than the retail price, thus bringing down the GST actually levied. Furthermore, since the number of manufacturers in the country is significantly lower than the number of distributors therefore; it would be relatively easier and swifter for the FBR to manage tax collection, thus boosting chances of meeting tax collection targets going forward. However, one caveat is that room for understatement of actual prices of products by the manufacturers would significantly rise thus requiring more scrutiny from the FBR.

Nonetheless, upon a more deep realization of the proposed FBR move and hopefully tighter and diligent management of tax collection by the FBR we could see this benefitting the national kitty and the Karachi Stock Exchange (KSE) subsequently.

Karachi Stock Exchange Daily Analysis

Cement sales increase

During  the  first  quarter of  the  current  fiscal year,  the  Cement  Industry  has posted a  growth of 2.17  percent  in local sales, compared with sales during the first  quarter  of  the  Last  Fiscal  Year.  However, exports recorded a 1.40 percent decline, compared with exports during the first quarter of last year. The  overall  situation  during  the  first  quarter  of  the  current  fiscal  year showed  1.12  percent  growth  compared  to  the  same  period  of  last  fiscal year. A spokesperson of the All-Pakistan Cement Manufacturer Association stated on Friday that after Negative Growth in cement dispatches during the first two months of this fiscal year, the industry recorded a robust growth in September by dispatching  2.951  million  tons  of  cement,  compared  with 2.611  million  tons  dispatched  in  September  last  year,  showing  growth  of 13.01  percent. Exports were down by 0.75 percent in July, 3.29 percent in August and 0.39 percent in September. Cement Exports have been declining continuously in the last 15 months and industry is now mainly depending on Domestic Market.  In  the  first  quarter  of  this  fiscal  year,  the  Cement  Dispatches were 7.796 million tons compared to 7.710 million tons during the same  period  last year.  The  cement  industry is  content that  during the  current  budget the  government allocated Rs1,155 billion for  the Public Sector Development Programmed, but so far industry has not been able to grow as expected  and  there  is  very  small  growth,  compared  with  the  same  period last  year.  Cement Exports To India Has Declined due to lower demand.  Export  To  Afghanistan  Has  Declined  due  to  the  uncertainty  prevailing  in  that country, with US and NATO troops planning a withdrawal by the end of 2014. During  the  last  budget  the  Cement  Industry  has  been  brought  within  the purview of the “3rd  Schedule,” which has increased the overall tax  burden and has resulted in increase in the prices.

Nawaz-Obama meeting to seal IP GASLINE Fate

The fate of Iran-Pakistan Gas Pipeline project would largely depend on out-come of Prime Minister Nawaz Sharif’s crucial meeting with US President Barack Obama on October 23. Energy crisis in Pakistan and the multibillion dollars gas pipeline project would be among the key items on the agenda of the meeting.  The government is working on various proposals to secure backing of the US President on the gas project. US sanctions regime do not apply to IP gas pipeline project, as it does not entail direct transaction with any of  the  public  sector  banks of  Iran.  Since the  project would  be  handled through  a  non-governmental  organization  of  Iran,  therefore,  there  was  no risk of US sanctions attached to the gas pipeline project.

Two percent extra ST imposed on import of items

The two percent extra sales tax has also become applicable on the import of items,  which  were  recently  excluded  from  Third  Schedule  of  the  Sales Tax Act under SRO 896(I)/2013. The rate of two percent was also worked out on the basis of actual value addition of these sectors from the manufacturers till retail stage. Technically after exclusion of items from 3rd schedule tax would be calculated on ex-factory price instead of retail price and normally there is at least 15 percent gap between retail or ex-factory price hence applying 17 percent sales impact the measure roughly give benefit around @ 2.55 percent at the other end extra levy was imposed @ 2 percent hence still tax payer would get some relief even after applying extra tax, further tax payer would no more require to follow complex procedure for printing and observing retail price on each of their items. Here it is important to note that now extra tax is  also  put on  imported items  whereas 3rd  schedule was  not applicable  on  imported goods hence  disparity between local product and imported goods were also settled at the one end and tax impact was enhanced on imported goods at the other end. The Federal Board of Revenue (FBR) however did not exclude application of further tax and sales tax withholding on items levied with extra tax was the measure required to be take up as per agreed principle and to achieve entire satisfaction of the business community are the reason behind negative reaction on this particular account by business community.

World Bank to give $2.2 billion for 15 projects

The government has reportedly claimed that the World Bank will provide $2.205 billion for 15 projects in the pipeline. The Senate Standing Committee on Finance was informed by the Economic Affairs Division that $500 million were in the pipeline for Dasu Hydropower Project and $300 million for Power DLI.  A revenue mobilization DLI project of $300 million is also in the pipeline for funding by the World Bank. The funding in the pipeline for other projects by the WB includes $150 million for Sindh Barrages (Irrigation), $100 million for Sindh Agriculture Growth and $160 million for Sindh Water Sector Improvement. The funding of $100 million for Indus Connectivity Project and $55 million for Nutrition Project is also in the pipeline. The WB would provide $50 million for Punjab Government and service delivery project, $50 million for immunization support project and $50 million for Punjab skills project. The meeting was reportedly informed that the funding of $150 million is in the pipeline for access to finance project and $200 million for Sindh On-Farm Agriculture Productivity Project and $40 million are in the Pipeline For CASA Project.

Italy to provide Rs5.7b debt relief to Pakistan

The Italian Ambassador to Pakistan Chiodi Cianfarani called on the Finance Minister Senator Ishaq Dar at his office on Sunday. The Italian Ambassador conveyed the sympathies of the people and government of Italy over the recent Earthquake In Balochistan  and  offered  to  donate  300,000  Euros  for  the  earthquake  affecters.  Ambassador  Cianfarani  also  informed  the minister that Italian Vice Minister of Foreign Affairs plans to visit Pakistan and would be accompanied by a business delegation. Italy, he said, is keen to expand the existing bilateral economic relations between the two countries. Ambassador Cianfarani informed the minister that Italy has agreed to provide a debt relief of Rs5.7billion to Pakistan, which can now be utilized by the Government of Pakistan for its poverty alleviation programmed as well as Citizens Damage Control Programs. The finance minister said that Pakistan values its relations with Italy and is keen to expand economic ties with it. He thanked Italy for supporting Pakistan’s case in IMF and expected the hope that it would also extend its support in European Union for grant of GSP plus to Pakistan.