Auto-Sector margins expected to damper owing to PKR devaluation

November 20, 2018 (MLN): Auto sector valuations are highly volatile, as whenever Pakistan’s economic indicators show signs of slowdown, auto sector estimates are usually the first to retreat as a small change in rupee parity or input cost brings a magnified impact on margins.

According to the research report released by Insight Securities, latest results also reflect the sensitivity of Auto assemblers’ (INDU, HCAR and PSMC) profits which slumped 27% YoY as gross margins dropped to 9.6% from 13.4% YoY, due to continuous waves of PKR devaluation.

As per the report, in the next two quarters the margins will drop further, due to recent 6% devaluation of PKR, price increase strategy (Nov- Jan) adopted by car makers and the expectations about the 5% depreciation in PKR till June 2019.

As the government heads into another IMF Program, more stabilization measures will be taken which would slowdown economic growth and consumers’ purchasing power that will hurt the auto sector, the report says.

The report further highlighted that, in 4MFY19, sales remained flattish YoY at 84K units, where anticipated price hike kept customers interest alive.

Moreover, auto financing is expected to slow down further due to rising costs and falling purchasing power of the middle-income group. On the other hand, more banks would be willing to venture into auto financing due to increase in interest rates.

Due to sharp PKR devaluation, CBU imports are expected to be more affected than the locally manufactured cars, states the report.

The research firm further states that, a 10% decline in sales is expected in FY19, but it will be recovered due to the double-digit interest rate (over 12%) and further substantial PKR devaluation, which could push prices higher and affect the volumes for a longer period.

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Posted on: 2018-11-20T20:41:00+05:00