Pakistan Autos industry sees growth in Sept 20

In September 2020, the Auto industry sales witnessed double-digit growth (19% mom and 18% yoy) to 13,982 units. The phenomenal growth was driven by the premium cars segment, led by INDU (sales up 32% mom and an astounding 106% yoy) and HCAR (sales up 20% mom and a sharp 87% yoy). This takes 1QFY21 industry sales to 37,383 units (up 8% yoy). The uptick in demand may have been propelled by the sharp interest rate cut to 7% (from 13.25%) and overall economic improvement, following the easing of the Covid-19 lockdowns. PSMC sales, however, rose a modest 8% mom.

INDU sold 1,219 units / 2,421 units of Corolla / Yaris, both of which rose c.40% mom. We believe Yaris sales will continue its upward trend due to a healthy backlog of orders, as per channel checks. INDU recently announced the start of double-shift production, in order to decrease production lead times. This implies an uplift in demand and a strong backlog of orders.

HCAR sold 2,710 units in September, with Civic and City sales of 2,293 units (up a staggering 68% yoy and 16% mom). BR-V sales increased by a sharp 50% mom, to 278 units. We think this could be attributed to promotions on Civic through banks.

PSMC’s Wagon R sales rose a sharp 58% mom and 71% yoy to 1,161 units, while sales of the Alto rose 30% mom to 3,104 units (albeit down 37% yoy). The yoy decline in sales for the Alto (and PSMC overall) may be attributed to a higher base amid the new Alto launch in June 2019, which was well received.

Tractor industry recorded sales of 4,256 units, up 50% mom while up a decent 13% yoy. AGTL sales saw a sharp rise in mom sales to 1,441 units from 633 units. Sales for MTL were up 28% mom, while up a staggering 69% yoy to 2,815 units. The increase in sales may be due to the pent-up demand following the torrential rains in August.

Sales for Hyundai clocked in at 316 units in September, compared to 110 units in August. The increase in sales was led by the newly launched Hyundai Tucson with 215 units. Kia sales, in contrast are estimated to be 1,500-2,000 units, according to channel checks, led by the Sportage. The newly emerging compact SUV market seems to be pulling sales away from the premium car segment, in our view.

Total industry sales in September of 13,982 surpassed average monthly sales during FY20 by 11% (highest monthly sale was in July of 12,594 units). Looking ahead, we believe sales to normalize from October, before declining in November and December due to the year-end phenomena. Thereafter, the sharply lower interest rates can lift sales through auto-financing earlier than expected, in our view. In this backdrop, more new models such as a new Honda City and rumored Kia Cerato (among other entrants) could serve to attract consumer interest.

We have an Underweight stance on the OEM sector because we think that the 37% rally in stock prices (since May) have more than priced in the positives. We are Neutral on INDU with a TP of PKR1,273/sh and MTL (TP of PKR902/sh) in the tractors space.

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