November sales up by a modest 5% YoY
Auto sales posted modest growth of 5%YoY in November 2013, where (1) soft farmer income and (2) overhang of inventory from earlier imports and amnesty scheme, kept demand for domestically produced vehicles muted. Meanwhile, monthly auto sales registered a second consecutive sequential drop (-4% MoM) due to a seasonal downtrend as customers delay their purchases until the New Year. Pak Suzuki (PSMC) somewhat defied this trend, with sales rising by 8% MoM. Overall, auto sales clocked in at 52,384 units (+7% YoY) during 5MFY14, trending in line with our full-year FY14E sales target of 145k units (+7% YoY).
AIDP-2 waiting in the wings
The government is expected to unveil the new auto policy (AIDP-2) soon. We mostly view the policy favorably for the sector as it will provide a 5-year regulatory framework for the sector with reduced duties across the board (though duty protection is expected to remain intact) in a phased out manner. Also, potential relaxation for entry for newcomers is unlikely to hurt current assemblers, in our view, where reported product line-up for new entrants to the sector (mini vans/cargo/pick-ups) differs from that of present assemblers (excluding Hilux of Indus Motors). However, any increase in allowable age limit of imported cars (not part of the initial draft) could be a major negative for the sector.
PKR concerns mount cost pressures for the sector
We flag June-2013 to-date PKR depreciation of 9% each vs. the JPY and USD is likely to limit recent surge in the sector’s margins. With delays in the announcement of AIDP-2 and rising cost concerns, we remain unexcited about the Pak auto sector even though valuations have turned undemanding (FY14E P/E of 6.3x vs. the market’s FY14E P/E of 8.7x) due to recent auto stocks underperformance. We maintain our ‘Hold’ recommendation on both Indus Motors (INDU: Target Price Rs341) and Pak Suzuki (PSMC: Target Price Rs159).