After incorporating the duty relief for 850cc and below vehicles proposed in the budget, we revise up our earnings estimates for CY21/22/23 to PKR 42.8/50.5/64.0 per share and target price to PKR 450/sh. To the attraction, the company is hedged against increased competition as the new entrants have largely ignored the 1000cc and below vehicle segments. Moreover, due to new vehicle launches in the auto sector, PSMC may announce a new model of the Suzuki Swift, which may increase our target price further.

All these warrant a BUY call for PSMC with Jun’22 target price of PKR 450/sh, offering an upside of 27% from the last close.

Budget 21-22 incentives to target economy cars: As part of the annual budget 21-22, the government has proposed abolishment of FED (Pre-budget 2.5%) and reduction in sales tax to 12.5% (Pre-budget 17%) on locally manufactured vehicles with engine capacity upto 850cc. The major beneficiary of these reduction in duties should be PSMC as three out of its six completely knocked down (CKD) vehicles fall under the 850cc category; namely, Alto (660cc), Bolan (800cc) and Ravi (800cc).

Investment Outlook:

Taking the upbeat demand from the auto sector and budget duty relief into account, PSMC is expected to fare better compared to previous years. Moreover, the company may capitalize on the sector upcycle with launch of the new Swift’21 model. This should enable impressive profitability of PSMC going forward.

Hence, we issue a BUY call with Jun’22 TP of PKR 450/sh, (upside of 27%).

Risks: Withdrawal of budget relief; 2) Increased competition from small electric vehicle, 3) Increased competition from launch of new ICU vehicles (under 850cc) to avail benefit; and 4) Lower auto demand due to interest rate hike in the medium term.

Courtesy – BMA Capital Management Ltd.