In February 2022, Auto industry sales rose by a handsome 32% yoy to c.21,650. Sequentially, however, sales are up a mere c.5% mom, due to the pent-up deliveries which had been delayed last month (uncertainty over change in FED in the Mini-Budget). The yoy growth in sales was led by PSMC (c.40% yoy growth), followed by HCAR (c.15% yoy). Sales for INDU grew by a mere c.5% yoy. Thus, 8MFY22 sales clocked in at c.178,000 units (up c.55% yoy).

Among INDU models, combined volumes of the Premium segment cars (Fortuner and Revo) increased by c.55% yoy, while combined Corolla & Yaris sales decreased by c.5% yoy to c.3,650 units. The yoy decline in Yaris volumes is likely to have dragged the combined sales, in our view.

PSMC sales clocked in at a c.12,650 units, up a sharp c.40% yoy, led by rebounding sales of Wagon R (low base) and Alto. According to channel checks, the mom surge in volumes of PSMC is due to pent-up deliveries from previous month. To recall, PSMC sales had shrunk to c.9,000 units in January due to uncertainties around the increase in FED in the Mini-Budget.

HCAR sold c.2,750 units in February, up c.15% yoy, led by combined Civic & City sales of 2,286 units, on account of rolling out of the new City. On a mom basis, volumes declined by c.40% mom, likely due to phasing out of the 10th generation Civic model. HCAR recently launched the new Civic (11th generation), where deliveries commence by April 2022.

Sales for AGTL clocked in at c.2,050 units, up a sharp c.40% yoy and 5% mom (low base). We expect tractor sales to resume the uptrend in the coming months amid elevated farmer income. However, the growth will be checked by delays in GST refunds, in our view, as MTL recently announced temporary closure of operations amid the issue.

Despite measures taken by both the government and SBP to moderate growth in auto sales, volumes in February witnessed handsome yoy growth (largely led by the Economy segment). However, industry growth is likely to retract in the coming months due to (i) measures aimed at reducing auto-financing (including rising interest rates), (ii) increase in prices due to higher FED and other taxes in Mini-Budget, and (iii) longer delivery lead times on account of supply-chain issues (semiconductor chips and other parts). Also, the surge in international commodity prices amid Russia-Ukraine conflict will fuel another round of price hikes (further dampening demand), in our view. We therefore have a Marketweight stance on the Auto sector, while Overweight on the Tractor sector, and prefer INDU (TP of PKR1,475/sh) and MTL (TP of PKR1,000/sh) as our top picks.

Courtesy – Intermarket Securities Limited.