Pakistan’s import landscape has experienced a significant shift following the implementation of measures under the International Monetary Fund’s Stand-By Arrangement (SBA). The nation’s total import bill has soared by a substantial 30% on a month-on-month basis, reaching a notable US$5 billion. This increase has been attributed to the relaxation of import restrictions, particularly on luxury items, and the clearance of long-standing payment obligations.

A noteworthy trend that has emerged is the surge in the import of Complete Knock-Down (CKD) units, a crucial component for local car manufacturing. Despite constituting a relatively minor fraction of overall imports, CKD imports have spiked by an impressive 77% on a month-on-month basis, amounting to US$71 million. This surge marks the highest monthly record for local assemblers and is anticipated to have a positive impact on the production of cars during the ongoing month.

The local car manufacturing industry has faced production constraints due to a shortage of CKD units and delayed payments to foreign suppliers, both consequences of the scarcity of foreign exchange. The scarcity of CKDs led to a significant decline in car production, reaching its lowest level in July 2023, as depicted in the graph. Throughout the first half of the current year, car production averaged around 7,500 units per month according to the Pakistan Automotive Manufacturers Association (PAMA), a sharp contrast to the monthly average of 24,000 units in the same period last year, marking a steep decline of 69%. Alarmingly, the production for July 2023 plummeted to 5,300 units, registering one of the lowest monthly figures since the onset of the COVID-19 pandemic.

Throughout the first half of the current year, average monthly CKD imports stood at US$43 million, a stark difference from the average monthly imports of US$146 million during the corresponding period last year. The surge in CKD imports to US$71 million in July 2023 has injected optimism into the local car manufacturing sector, representing the highest imports in the last eight months.

Conversely, the relaxation of import restrictions and the resolution of pending payments have had ripple effects on the Pakistani Rupee’s value against the USD and the Yen. This has led to a substantial devaluation of the PKR by 24% and 16% against the USD and Yen, respectively, during the current calendar year, with recent monthly depreciations of 4% and 2%, respectively. In response to these fluctuations, local car assemblers have raised car prices by a significant 33% since the beginning of the year. Consequently, the industry is less likely to witness further price hikes unless other operational costs surge.

As the CKD imports surge offers a glimmer of hope for the struggling car manufacturing sector, investors are keeping a watchful eye on the industry’s production outlook. The recent uptick in CKD imports, especially in July, is expected to sustain monthly production levels of 8,000 to 9,000 tons during August and September 2023. The continued influx of CKD imports will play a pivotal role in determining the profitability of local car assemblers.

Amid this uncertain backdrop, investors are seeking opportunities with the most attractive price-to-book ratios (P/BV). Currently, car assemblers are trading at a P/BV of 1.2x, which is the lowest observed in the last decade and 39% below the 15-year average P/BV of 2x. Of note, Honda Atlas Cars (HCAR) stands out as an attractive option, trading at a historically low P/BV of 0.9x, compared to an average of 3.0x. Historically, HCAR has commanded a premium within the industry.