New Year Effect Dampens Auto Sales; Revised Import Policy Clouding Industry Outlook

New Year effect in play: November 2010 saw industry volumetric sales decline by 15% MoM, a trend attributable to New Year effect and anticipation of reduced car prices in 2011 (RGST to go down to 15%). YoY sales bucked this trend, jumping 18%, thanks to a recovery in 800 and 1000cc segment sales. This took total 5MFY11 sales to 58,802units.

Despite slower MoM sales, PSMC remains market leader: PSMC’s market share jumped to 54%, owing to its domination of 800 and 1000cc segments and the ongoing YoY recovery in volumetric sales in the said categories. This was also a result of attrition in INDU’s market share (down from 39% to 36%), due to weaker Corolla sales.

Imports of 5-year old cars allowed could mean greater competition for local producers: Approval of proposal allowing import of 5-year old cars could ramp up competition for local auto producers, and induce a substitution effect, but it’s difficult to determine the extent, as PKR/Yen parity has touched new lows.

Year end effect to keep Dec 2010 sales muted: While sector outlook remains clouded, volumetric sales have still demonstrated strength. We expect to see a slowdown in Dec 2010 due to New Year effect. But PSMC which has already sold 72,410 units CYTD should easily equal, and quite likely surpass our sales forecast of 75,473units. We maintain our ‘HOLD’ stance on the scrip, with June 2011 PT of PKR77/share (CY10E EPS at PKR5.91).

New Year effect in play

Industry volumetric sales suffered a broad based slump on MoM basis, falling 15% in November 2010.  While weaker Corolla sales (down 26% MoM & 9% YoY) contributed to this trend, main reasons underlying the slowdown include year-end effect (consumers prefer January registered cars), and possibly, anticipation of lower prices in 2011 due to a reduction in RGST rate (from 17% to 15%). Despite MoM decline, sales jumped by 18% YoY, reflecting a strong upward trend, driven mainly by recovery in 800 and 1000cc segments (increased 32% and 27% YoY respectively). This took total 5MFY11 sales to 58,802 units.

Despite slower MoM sales, PSMC remains market leader

Despite a 9% MoM decline in sales, owing to its monopoly in 800 and 1000cc segments and given the ongoing YoY recovery in volumetric sales in the said categories, PSMC reigns supreme with a 54% overall market share (up from 50% in Oct-10). This was also a result of attrition in INDU’s market share (down from 39% to 36%), due to weaker Corolla sales.

Imports of 5-year old cars allowed could mean greater competition for local producers

Finally, after being delayed numerous times, the Economic Coordination Committee (ECC) recently approved MoI&P proposal, allowing import of 5-year old vehicles. We expect this to ramp up competition for local auto producers, which in face of rising costs (raw material costs and PKR/Yen weakness) have so far refused to back down from hiking prices. Revised import policy could trigger a substitution effect; however, it is difficult to ascertain its extent as PKR has depreciated considerably against USD and Yen since FY07 (42% & 108% respectively), which makes imported cars today more expensive than they were back in FY07.

Year end effect to keep Dec 2010 sales muted

While rising costs, uncertain regulatory environment and overall macroeconomic weaknesses remain dominant factors that cloud outlook for the auto sector, overall volumetric sales have demonstrated strength. December 2010 will most likely see a slowdown due to New Year effect, as consumers postpone buying decisions to January 2011. Nevertheless, PSMC, which has already sold 72,410 units CYTD should easily equal, and quite likely surpass our sales forecast of 75,473 units. We maintain our ‘HOLD’ stance on the scrip, with June 2011 PT of PKR77/share (CY10E EPS at PKR5.91).

Economic & Political News

Failure to implement power sector reforms: government may have to raise subsidy by PKR100bn

The government may have to increase subsidy for power by PKR100bn for the current fiscal year due to failure of the Ministry of Water and Power and the Planning Commission to implement reforms in the power sector in an effort to minimize tariff differential as per the conditions of multilateral agencies. PKR30bn was earmarked as subsidy for power sector in the current fiscal year’s budget which was recently increased to PKR67bn largely due to failure of power reforms aimed at minimizing production and tariff recovery differential cost. The subsidy for power sector, an official of the Ministry of Finance said, is most likely to be increased by PKR100bn owing to PKR136bn to PKR156bn anticipated loss on account of tariff shortfall. The government is raising tariff by 2% each month effective October 2010 and will continue to do so for the remaining six months of the current fiscal year to bridge tariff differential cost of around PKR3.0/unit.
Analyst Certification:
The research analyst(s) denoted AC on the cover of this report, primarily involved in the preparation of this report, certifies that (1) the views expressed in this report accurately reflect his/her personal views about all of the subject companies/securities and (2) no part of his/her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.
Disclaimer

The report has been prepared by Elixir Securities Pakistan (Pvt.) Ltd and is for information purpose only. The information and opinions contained herein have been compiled or arrived at based upon information obtained from sources, believed to be reliable and in good faith. Such information has not been independently verified and no guaranty, representation or warranty, expressed or implied is made as to its accuracy, completeness or correctness. All such information and opinions are subject to change without notice. Descriptions of any company or companies or their securities mentioned herein are not intended to be complete and this document is not, and should not be construed as, an offer, or solicitation of an offer, to buy or sell any securities or other financial instruments.
Research Dissemination Policy
Elixir Securities Pakistan (Pvt.) Ltd. endeavors to make all reasonable efforts to disseminate research to all eligible clients in a timely manner through either physical or electronic distribution such as mail, fax and/or email. Nevertheless, not all clients may receive the material at the same time.
Company Specific Disclosures
Elixir Securities Pakistan (Pvt.) Ltd. may, to the extent permissible by applicable law or regulation, use the above material, conclusions, research or analysis in which they are based before the material is disseminated to their customers. Elixir Securities Pakistan (Pvt.) Ltd., their respective directors, officers, representatives, employees and/or related persons may have a long or short position in any of the securities or other financial instruments mentioned or issuers described herein at any time and may make a purchase and/or sale, or offer to make a purchase and/or sale of any such securities or other financial instruments from time to time in the open market or otherwise. Elixir Securities Pakistan (Pvt.) Ltd. may make markets in securities or other financial instruments described in this publication, in securities of issuers described herein or in securities underlying or related to such securities. Elixir Securities Pakistan (Pvt.) Ltd. may have recently underwritten the securities of an issuer mentioned herein.
Other Important Disclosures
Foreign currency denominated securities is subject to exchange rate fluctuations which could have an adverse effect on their value or price, or the income derived from them. In addition, investors in securities such as ADRs, the values of which are influenced by foreign currencies effectively assume currency risk. Foreign currency denominated securities is subject to exchange rate fluctuations which could have an adverse effect on their value or price, or the income derived from them. In addition, investors in securities such as ADRs, the values of which are influenced by foreign currencies effectively assume currency risk.

Contributed By