Turn in fortunes of Pakistan Auto sector gaining momentum

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auto-sector

  • We believe the positive turn in Pakistan Auto Sector is gaining momentum with the sector surrounded by positive news flows.
  • After a modest FY14E (+3% YoY sales growth in 11MFY14), we believe local auto assemblers are set for a strong FY15F.
  • We expect units sales can rise by as much as 50% YoY on the back of (1) Punjab government’s yellow cab scheme, (2) expected launch of eleventh generation Corolla and (3) favorable budgetary measures.
  • At the same time, a strong PKR vis-à-vis JPY and US$ points towards a robust margin outlook as auto assemblers have not passed on the full impact of the same to end consumers, in our view.
  • Our preferred play in the sector remains Pak Suzuki Motor Company (PSMC), where our Target Price shoots to Rs285 if the yellow cab scheme is incorporated. We maintain ‘Hold’ on Indus Motor Company (INDU).

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Exciting volumes growth ahead…

We believe the positive turn in Pak Autos fortunes is gaining momentum with the sector surrounded by positive news flows. FY14E turned out to be a modest year for the sector, where unit sales have inched up by 3% YoY in 11MFY14. We believe Pak Autos are set for a strong FY15F, where we expect unit sales can rise by as much as 50% YoY to 200k units on the back of (1) Punjab government’s 50,000 units yellow cab scheme, (2) recent launch of Wagon-R by PSMC, (3) expected launch of eleventh generation Corolla by INDU and (4) favorable budgetary measures. In budget FY15, the Federal government had eliminated FED on Fortuner and increased duties on imported CBUs. Furthermore, media reports suggests government may allow import of CNG kits by local auto assemblers (banned in November 2011), which should further boost industry sales.

 

…while strong PKR likely to boost margins

Meanwhile, we anticipate a strong PKR vis-à-vis JPY and US$ points towards a robust margin outlook for the local auto assemblers in FY15F. We believe the full impact of YTD 2014 PKR gains (6% against JPY and US$ each over last four months) have not been passed on to the end consumers. Our back of the envelope working suggests that for every 1% PKR gains vs. JPY and USD, Pak Suzuki (PSMC) and Indus Motor (INDU) have an annualized earnings impact of 8% and 6% respectively.

 

PSMC ideally placed

Our preferred play in the sector remains Pak Suzuki Motor Company (PSMC), where our Target Price shoots to Rs285 if the yellow cab scheme is incorporated. We also believe PSMC can be a primary beneficiary of any relaxation on import of CNG kits by the government for local auto assemblers as sales of lower-end cars

are more elastic to availability of CNG variants. Meanwhile, we maintain ‘Hold’ on Indus Motor Company (INDU) as we believe the positives are largely priced-in in INDU stock price.

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