Pakistan’s auto assemblers’ profits decline 27 percent

KARACHI: The profitability of the Pakistan’s auto sector declined by 27 percent to Rs4.6 billion for the quarter ended September 30, 2019, compared with the profits of Rs6.4 billion in the corresponding quarter last year.

“The decline in earnings was mainly driven by a 378bps drop in gross margins on the back of sharp Pak rupee devaluation of 18 percent against the dollar,” Ahmed Lakhani at JS Global Capital said.

Although, net sales increased by 9.0 percent during the period, this was primarily due to price increases (to offset the rupee devaluation) whereas volumes during the quarter were down 4.0 percent. Moreover, administrative expenses surged by 39 percent during the quarter.

Although the sector’s volumes moved north by 6.0 percent YoY/ 28 percent MoM during October 2018, this was merely on account of higher production numbers during the month, resulting in as earlier-than-expected clearance of pre-existing order backlog as reiterated earlier.

This theory is supported by a decrease in advances in all three constituents of the sector, i.e. Pak Suzuki (PSMC), Indus Motor (INDU) and Honda Atlas (HCAR), where advances fell by 48 percent QoQ and 23 percent QoQ for PSMC and INDU, respectively.

Although, HCAR does not provide quarterly Advances data, Trade and Payables reduced by 3.0 percent QoQ. Another point worth mentioning here is that PSMC has resorted to debt financing (Rs4.0 billion) to meet its working capital requirements in the recent quarter; whereas, it has generally relied on internal cash generation for its financing requirements, which again points towards a tougher business environment.

Moreover, PSMC was taxed at 1.25 percent of its turnover in 1QFY19 as per the Income Tax Ordinance 2001 (higher of corporate or turnover tax), resulting in a 79 percent effective tax rate during the quarter.

“Going forward, we view that the sector’s profitability will remain subdued in 2019 owing to a multitude of factors such as price increases (INDU and HCAR will increase prices again from Jan-2019 as specified by these companies), interest rate hikes, lower buying power from rising inflation and restriction on non-filers. Beyond 2019, when the competition begins to roll in (Kia and Hyundai) is when things might begin to heat up further for the existing local assemblers,” Lakhani added.

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