Pakistan Autos staged a robust rebound during 4MFY21

After a dismal FY20, the Auto OEMs staged a robust rebound during 4MFY21, outpacing last year’s sales by an average 14% yoy. We believe the present momentum will prove sustainable given the recent macro improvements and estimate industry sales to rise by 37% yoy in FY21.

We have thus lifted our sales assumptions in 2021/22f for the OEMs by c.15/11% on average, which is driving earnings revision of 40%/30% for INDU and HCAR while PSMC is expected to be profitable again by CY22f. We think that new models by new entrants will mobilize the OEMs to expedite their own new model launches – a key catalyst for sales growth.

We have upgraded INDU from Neutral to Buy (Jun’21 TP of PKR1,458/sh) and maintain Neutral on HCAR (Mar’22 TP of PKR325/sh). We also upgrade our rating on PSMC from Sell to Neutral, with Dec’21 TP of PKR207/sh.

Lift estimates amid improved sales outlook

We revise our estimates of the IMS Auto Universe, in light of (i) the better-than-expected sales growth post lifting of lockdown conditions in Pakistan, and (ii) the ongoing macroeconomic improvement, which will continue to make cars more affordable. We prefer INDU (Buy; June 2021 TP of PKR1,458/sh), where our liking emanates from: strong demand for the Yaris, growing farmer income amid INDU’s strong presence in rural areas, being more shielded from new entrants than peers, and balance sheet strength. We upgrade our stance on PSMC to Neutral from Sell (December 2021 TP of PKR207/sh) as sharply lower interest rates have significantly curtailed losses; we now expect PSMC to return to profitability by 2022. We, however, maintain our Neutral stance on HCAR, with a rolled over March 2022 TP of PKR325/sh, where the launch of new City (albeit delayed) remains a key catalyst, while Civic grapples with new competition.

More new models on the horizon

Backed by lower-for-longer interest rates, moderate inflation, and GDP growth picking up, we now expect total industry sales of passenger cars of c.193,000 for FY21 compared to c.143,000 in FY20. Our earlier estimate for total industry sales was c.153,000 cars. Since new car launches by the new entrants must happen before 30 June 2021, we expect more new models for the remainder of FY21 (details inside). We believe this has already mobilized the incumbents to introduce their new models to protect their market share. These are likely to include Corolla X (INDU) and Honda City (HCAR), and we think PSMC might replace the recently discontinued Swift soon as well. Note that the launch of the Yaris and SUVs by new entrants have been fairly well-received. Yaris lifted industry sales growth rate by 1ppt mom in October despite a decline in sales for both HCAR and PSMC.

Margins recovery will be lagged

We have increased FY21/22f EPS estimates for INDU and HCAR by c.40%/30% on average, while we expect PSMC to be moderately profitable by CY22f. The growth in sales is likely to drive the recovery in margins for the incumbents, as the overheads per unit will decline. However, we believe that margin recovery will be slower than sales growth in the near term due to (i) present supply issues for imported parts where disruptions at Asian ports have led to expensive air shipments, and (ii) the rise in international commodity prices such as steel and rubber. The recent PKR/US$ appreciation will not be immediately realized, as we understand that the OEMs have booked CKDs at higher rates. (Intermarket Securities Limited)

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