Morning Shout released by KASB Securities Limited and Economics Research

Karachi, July 13, 2012 (PPI-OT): Autos: 4Q sales prove to be the strongest in FY12

According to KASB Securities Limited,

• As per recent data released by PAMA, sales of cars and LCVs grew by 155% YoY in June-2012, taking 4Q sales up 46% YoY/8.5% QoQ to 50,575 making it the best performing quarter of the current fiscal year.

• Completion of taxi scheme orders helped PSMC maintain its strong sales run in 4Q, while Indus and HCAR sales improved by 6% and 262% QoQ on seasonal improvement in rural income and resumption of parts supplies respectively.

• Overall industry sales trend in FY12 indicates 22% YoY growth, but only 8.6% when adjusted for Punjab taxi scheme orders (20k completed in FY12). KASB Securities Limited attributes the tepid growth to weak farm economics and relaxed import policies.

• Looking ahead, while demand for local cars could continue to suffer, potential changes on regulatory front (import duties) and inability to pass-on any further devaluation in PKR/Yen could pose a challenge for the industry.

• In this backdrop, KASB Securities Limited prefers Indus over PSMC as Indus enjoys better pricing power due to its strong brand and less price sensitive target segment (1,300cc and above). Reiterate Buy on Indus with a PO of PRs325/sh (21% upside).

Auto sales up 155% YoY in June-2012

As per recent data released by PAMA, sales jumped by 155% YoY in June-2012, mainly on account of low base comparison from last year where June-11 saw tax arbitrage factor dragging volumes, as buyers deferred deliveries to July-11 to benefit from abolition of 2.5% SED and 1ppt lower GST. PSMC fared the best of the lot as it completed orders of Punjab taxi scheme allocated for FY12, with volumes up 311% YoY. This helped PSMC maintain its strong sales run in 4Q (flat QoQ). On the other hand, sales for Indus increased by 6% QoQ where improved sales for Hilux (up 2.2x QoQ) more than offset the decline in Cuore sales attributed to suspension of production from May-2012.

On a MoM basis, sales remained relatively resilient, up 15% owing to (1) seasonal improvement in farm economies, and (3) backlog of orders in case of HCAR which resumed production in Mar- 12 (HCAR sales up 93% MoM and 262% QoQ).

FY12 – Punjab taxi scheme acts as a blessing

Overall industry sales trend in FY12 indicates 22% YoY growth, but only 8.6% when adjusted for Punjab taxi scheme orders (20k completed in FY12). Relaxed import policies continue to dent demand for locally assembled cars and LCVs, where as per recent reports, 41,500 used cars were imported during the period July May 2012 compared to ~7k imported in FY11.

But sales outlook for 1HFY13 appears dim

July onwards, sales could suffer due to completion of taxi orders in Punjab (as per company discussions, orders for FY13 have not been made yet) and impact of ban on CNG kits, while complete phase-out of Cuore and Alto inventories would also suppress volumes in the coming months. Looking ahead, potential regulatory changes involving import duties to be finalized under the new AIDP, poses key risk to industry-wide demand and cost pressure. In addition, while Indus could continue to divert spare capacity (from Cuore) towards Hilux given increased attraction towards its Vigo Champ model (Hilux), clarity on PSMC’s plans to potentially roll out a new variant to utilize Alto’s production capacity (14% for the company in FY12) is a key upside risk for volumes.

Reiterate Buy on Indus, U/P for PSMC

KASB Securities Limited prefers Indus over PSMC as Indus enjoys better pricing power due to its strong brand and relatively less price sensitive target segment (1,300cc above). After recent price hikes (preempted by PSMC to pass on cost of Euro-II compliance), PSMC may find it difficult to pass on the cost of Yen appreciating by 7.8% in 2Q12 while Indus has already passed on cost impact in its latest price revision effective 26th June. KASB Securities Limited reiterates Buy on Indus with a PO of PRs325/sh, providing upside of 21% along with a dividend yield of 12% for FY13E.