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Karachi, November 29, 2013 (PPI-OT): Autos: Unfolding dynamics
According to AKD Securities Limited, the auto sector has garnered much limelight of late with all stakeholder eyes on the new auto policy titled ‘Auto Industry Development Program II’ (AIDP II), with the policy likely to be announced by the end of the current year. The policy will pit manufacturers against dealers where Autos: Unfolding dynamics
The auto sector has garnered much limelight of late with all stakeholder eyes on the new auto policy titled ‘Auto Industry Development Program II’ (AIDP II), with the policy likely to be announced by the end of the Current year.
The policy will pit manufacturers against dealers where AKD Securities believe the GoP could take a balanced approach and may potentially increase the age limit of used imported vehicles to 5 years from current 3 years. Recall that, auto manufacturers witnessed a growth phase over FY13 with margin expansion aided by concurrent product price increases as well as the depreciating JPY.
With a recent reversal in JPY, manufacturers have announced further price increase to arrest any potential margin erosion. Going forward, currency movement as well as measures undertaken in the new auto policy are likely to dictate the fortunes of auto manufacturers where AKD Securities remains cautiously optimistic on INDU with a TP of PkR385/share.
That said, the scrip could come under pressure in the near term owing to potentially subdued results with Corolla sales likely to witness declines as consumers await the new Corolla model likely to be introduced in mid CY14.
The New Policy – What could it entail? The new auto policy titled ‘Auto Industry Development Program II’ (AIDP II) is largely expected to be announced by the end of the current year. In this regard, an ECC commission formed for finalizing the new policy has scheduled a meeting next week with all stakeholders including Importers and Manufacturers. Key proposals to be considered include the following:
i) Local manufacturers are reportedly lobbying for an exemption from turnover tax for the auto industry as well. In addition, manufacturers are also seeking a reduction in advance tax to 1.5% from previous 5.0% on import of CKD and CBUs.
ii) Manufacturers are also looking for a ban on used car imports, contrary to the position of auto dealers. In this regard, the All Pakistan Motor Dealers Association (APDMA) is reportedly proposing bringing used cars / vehicles under the ambit of commercial import as well as raising the import age limit to 5-10 years.
iii) The committee will delve into a proposal for introducing a tariff protection plan for new entrants within the auto manufacturing industry.
Potential stable profits going forward? Profits for auto manufacturers have witnessed a strong growth trajectory owing mainly to i) price increases and ii) declining JPY against the PkR. Consequently, sector GMs increased to 6.6% in FY13 from 4.2% in FY11.
Going forward, AKD Securities believes the strengthening JPY and US$ against the PkR are likely to keep margin expansion in check where manufacturers have already announced price increases recently to counter the adverse currency impacts. AKD Securities financial models currently incorporate GMs of 6%-9% for auto manufacturers. Sales volumes are also expected to remain stable (barring any significant development in the upcoming AIDP II) where recent uptrend in consumer financing has largely gone towards the second hand auto market, in AKD Securities view.
Investment Perspective: The listed auto sector has gained 51% CYTD outperforming the benchmark index by 8% in the same period. AKD Securities attributes this gain to an uptick in sales units coupled with currency gains for the local auto industry. At current levels, AKD Securities remains cautiously optimistic pending the finalization of the new auto policy. While INDU remains AKD Securities top pick in the sector with a TP of PkR385/share, results could potentially dip in the coming quarters (leading to stock price pressure) on account of possible lower Corolla sales with the new model expected to arrive in mid CY14.